DBRS Comments on Fiat’s Proposed Strategic Alliance with Chrysler

DBRS noted today that Fiat S.p.A. (Fiat) and Chrysler LLC (Chrysler), along with Cerberus Capital Management L.P. (Cerberus), on January 20, issued a joint announcement that the companies have entered into a non-binding term sheet to establish a global strategic alliance (the Alliance). DBRS notes that the announcement has no impact on the ratings of Fiat and Chrysler at this time, as the Alliance remains subject to due diligence and regulatory approvals. Furthermore, upon effectiveness, DBRS considers it unlikely that the Alliance, in isolation, would have an impact on the ratings of the companies given highly uncertain global market conditions and many other factors affecting the ratings including, but not limited to, the companies’ respective liquidity positions.

Under the terms of the Alliance, Fiat is to provide Chrysler with smaller, more fuel-efficient vehicle platforms, as well as powertrains and other components. Fiat will also offer its distribution network in new markets for Chrysler. Finally, Fiat will advise Chrysler in its preparation and submission of the required viability plan to the U.S. Treasury. In turn, Fiat is to receive an initial 35% equity interest in Chrysler. DBRS notes that the Alliance does not incorporate a current cash investment of Fiat in Chrysler, nor is there any commitment for any such funding in the future.

While there is no immediate ratings impact, DBRS considers the Alliance to be modestly positive to the business profiles of both Fiat and Chrysler. With respect to Chrysler, it has historically been significantly overweighted to large vehicles, including pick-up trucks and SUVs. This particularly undermined the Company’s prospects last year when fuel prices sharply increased. Despite the significant moderation in fuel prices shortly thereafter, this volatility, combined with increasing environmental legislation across mature automotive markets, has significantly shifted vehicle segmentation toward smaller, more fuel-efficient vehicles. Fiat, in turn, specialises in smaller vehicles and thus its vehicle platforms and technologies should help considerably in rounding out Chrysler’s future product portfolio. Additionally, DBRS notes that the overwhelming majority of Chrysler’s sales are sourced in North America. Fiat’s distribution network opens several possible new markets for Chrysler, including Europe and South America.

From the perspective of Fiat, the Alliance would appear to present an opportunity for it to re-enter the North American market, which remains among the most significant automotive markets despite an alarming decline in 2008 that is expected to persist through this year and possibly into 2010. DBRS notes that the North American market is likely to be more receptive to Fiat’s product portfolio than in the past in light of the aforementioned shift toward smaller vehicles. DBRS further notes that there are no firm commitments from Fiat to invest cash into the Alliance; this is critical as automotive OEMs worldwide seek to preserve their liquidity position to help them survive the current severe industry downturn.

Both Fiat and Chrysler are significantly smaller in terms of production vis-à-vis leading global auto manufacturers such as Toyota Motor Corporation and Volkswagen AG. Accordingly, joint ventures and similar agreements to the Alliance are important in enabling smaller OEMs to achieve sufficient economies of scale to compete effectively as automotive production becomes increasingly prohibitive given augmented technological and legislation requirements.

For the near term, the ratings of both Fiat and Chrysler stand to be most impacted by the companies’ performance under severe market conditions as well as their respective liquidity positions, particularly where Chrysler is concerned. DBRS notes that Chrysler is due to present a further viability plan in March of this year to the U.S. Treasury. Positive acceptance of the plan is necessary for Chrysler to keep $4 billion in emergency loans that were provided last year, in addition to qualifying for an additional $3 billion in requested funding.

Notes:
All figures are in U.S. dollars unless otherwise noted.
The applicable methodology is Rating Automotive, which can be found on our web site under Methodologies.
Both Fiat and Chrysler are Corporate (Autos and Auto Parts) ratings.