DBRS Changes CNH’s Trend to Negative

DBRS has today changed the trend on the ratings for CNH Global N.V. and Case New Holland Inc. (CNH or the Company, collectively) to Negative from Stable. The ratings are confirmed at BBB (low). The rating action corresponds with the trend change applied to the debt of its parent, Fiat S.p.A. (Fiat). While the ratings for CNH and Fiat are not directly tied, there is a meaningful linkage given Fiat’s approximate 89% equity ownership of the Company. The trend change reflects the greater-than-expected increase in the Company’s debt levels, mainly related to the sharp slowdown in its construction equipment operations. In addition, the challenging near-term outlook increases the potential that credit protection will weaken to levels that are no longer consistent with CNH’s current BBB (low) ratings.

DBRS had expected improvement in CNH’s core credit metrics through 2008, which partly contributed to the upgrade of its rating in June 2008. However, while earnings substantially improved through the year in line with strong agricultural equipment market conditions, Q4 2008 results and the Company’s outlook for 2009 were below expectations, and debt substantially increased. The deterioration in earnings at the construction equipment division is largely responsible, and also contributed to the higher debt load (equipment operations) mainly caused by a substantial increase in inventory. As a result, leverage climbed to roughly 42%, which was well above the 2007 level of 32.5%. DBRS expects that the Company will reduce debt over the near term, primarily from cash generated by working capital reductions (namely, inventory draw-downs). However, the extent of the reduction is uncertain, particularly given the risk of weaker-than-expected operating results in light of limited macroeconomic and credit market visibility.

CNH expects sales and earnings to decline over the coming year, particularly in Q1 2009. The global deterioration in construction equipment demand is expected to continue and weigh most heavily on operating results. Unit sales of lower-horsepower agricultural equipment are also likely to decline and mitigate the impact of continuing favourable demand for CNH’s larger-horsepower agricultural equipment (which reached historically strong levels in 2008). In addition, CNH’s financial services business will not materially contribute to earnings as the Company restricts the growth of its portfolio and financial market conditions remain severely strained.

With respect to liquidity, CNH is expected to have sufficient access to credit and, if necessary, cash from deposits in Fiat affiliate cash management pools (over $2 billion at December 31, 2008), to redeem maturing equipment operations short-term debt of $1.275 billion in 2009 (the bulk of which is due to Fiat affiliates). However, the Company’s financial services division, which shares credit capacity with the equipment operations, also faces ongoing debt maturities that need to be addressed. Fiat anticipates that it will gradually reduce the level of funding that it has historically provided to CNH and is working with the Company to secure additional sources of financing to address near-term debt maturities. The fact that Fiat is facing severely weakened automotive market conditions and reduced financial flexibility related to sharply higher debt levels at end-2008 adds to financial risk, particularly in the absence of third-party financing sources over the near term.

The lack of progress in materially reducing debt, combined with declining operating performance over the near term, would likely lead to a rating downgrade. Alternatively, the rating would be confirmed and trend restored to Stable with reasonable cash flow and sufficient debt reduction, which is likely contingent on whether market conditions for larger agricultural equipment remain solid through 2009.

Notes:
All figures in U.S. dollars unless otherwise noted.

The applicable methodology is Rating the Industrial Products Industry, which can be found on our website under Methodologies.

This is a Corporate Rating.