DBRS Confirms Fiat - Changes Trend to Negative

DBRS has today confirmed the Senior Unsecured Debt ratings for Fiat S.p.A. and Fiat Finance Canada Ltd. (Fiat or the Company, collectively) at BBB (low). DBRS has, however, changed the trend to Negative from Stable. The trend change reflects the sharp increase in debt levels the past two quarters attributable to severe market conditions in most of the Company’s industrial operations. (Concurrently, DBRS has today also changed the trend on the ratings of CNH Global N.V. and Case New Holland Inc. (collectively, CNH) to Negative from Stable.) The increase in leverage is greater than anticipated by DBRS. Furthermore, given the weak market conditions that are expected to persist over the near term, there is an increased potential that credit protection measures will weaken to levels that are no longer consistent with Fiat’s current BBB (low) ratings.

DBRS notes that the increased leverage is due to two primary factors: high working capital absorption and greater capex levels. The use of working capital in 2008 amounted to a very significant EUR 3.6 billion and involved Fiat’s automotive division (FGA), as well as CNH and the commercial vehicle business (Iveco). DBRS notes that the use of working capital occurred entirely in the second half of year, as the Company’s markets (excluding agriculture) underwent a severe downturn, most notably in Europe. Fiat, as was the case with many original equipment manufacturers (OEMs), was unable to react quickly enough to the sudden and striking drop in industry volumes, resulting in a significant increase in inventory levels (primarily in trucks, as well as in agricultural and construction equipment), which was exacerbated by considerably lower levels of payables. Additionally, DBRS notes that Fiat’s capital expenditures in 2008 totalled EUR 4.9 billion, which represented an increase of EUR 1.3 billion relative to 2007 levels. The increased capex was largely attributable to powertrain investments at FGA; the Company has indicated that the elevated capex will not be repeated in 2009.

As a result of the above, Fiat’s industrial net debt as of year-end 2008 amounted to EUR 5.9 billion, which represents a significant increase from the EUR 3.3 billion reported only three months prior. In order to bolster its depleted liquidity position, the Company drew EUR 2.0 billion from its committed lines, leaving no remaining availability.

Fiat’s liquidity position as of year-end 2008 equalled EUR 3.9 billion, a significant decrease from the EUR 6.9 billion level seen at year-end 2007. This notwithstanding, DBRS considers the Company’s liquidity position to be sound. DBRS notes that debt maturities in 2009 include a relatively modest level of capital market obligations totalling EUR 0.7 billion. While the Company also has EUR 3.3 billion in bank debt due this year, DBRS notes that this debt is placed with Fiat’s core banks and, as such, is ultimately expected to be rolled over.

Despite weak markets that are projected to persist over the near term and pressure earnings, DBRS expects Fiat’s industrial debt burden to moderate as 2009 progresses. As the Company ultimately aligns its production with lower demand levels, the working capital absorption should be reversed, resulting in a significant infusion of cash for the Company. If this is achieved and the Company continues to perform reasonably well amid difficult conditions, the trend of the ratings could be returned to Stable. However, in the event that Fiat incurs losses and debt levels increase further, this would likely have negative ratings implications.

Notes:
All figures are in Euros unless otherwise noted.

Fiat Finance Canada Ltd. debt is guaranteed by Fiat S.p.A.

The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate (Autos and Auto Parts) rating.