DBRS Comments on Fiat’s Alliance with Chrysler and Discussions with GM Europe

DBRS notes that Fiat S.p.A. (Fiat or the Company) and Chrysler LLC (Chrysler) announced on April 30, 2009, that they have signed agreements to establish a global alliance (the Alliance). DBRS notes that the announcement of the Alliance coincided with Chrysler’s filing for bankruptcy protection in the United States. DBRS notes that the Alliance in isolation has no immediate impact on the ratings of Fiat amid highly uncertain global market conditions and many other factors affecting the ratings.

The main objectives of the Alliance are to increase the geographic and product diversities of both Fiat and Chrysler. The Alliance is to be formed through Chrysler’s submitting a motion under Section 363 of the Bankruptcy Code requesting approval of the Alliance as well as the sale of Chrysler’s principal assets to the new company (NewCo) being formed with Fiat. Fiat is to obtain an initial 20% equity interest in NewCo. Additional equity participants in NewCo include the Voluntary Employee Benefit Association (VEBA), which will be issued an equity interest of approximately 55%, as well as the U.S. Treasury and the Canadian government, which will collectively hold a 10% equity interest.

DBRS notes that Fiat will be able to receive an additional 15% equity interest that can be obtained in three tranches of 5%. Each of these additional tranches remains subject to the achievement of the following established targets: (1) approval to build the Fully Integrated Robotised Engine (FIRE) engines in the United States; (2) achievement of sales of Chrysler vehicles outside of North America; and (3) regulatory approval to build a Chrysler model based on Fiat technology. Furthermore, Fiat will have the option to acquire a further 16% shareholding in Chrysler from the beginning of 2013 through June 30, 2016. DBRS notes that Fiat’s shareholding in Chrysler will, however, be capped at 49%, subject to the repayment in full of the loans made to Chrysler by the U.S. Treasury.

While there is no immediate rating impact, DBRS considers the Alliance to be modestly positive to the business profile of Fiat. The Alliance would appear to present an opportunity for the Company 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 apparent shift in segmentation 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 original equipment manufacturers (OEMs) worldwide seek to preserve their liquidity positions to help them survive the current severe industry downturn.

DBRS also notes that Fiat has entered into discussions regarding a possible merger between Fiat Group Automobiles, Chrysler and the European operations of General Motors Corporation (GM Europe). DBRS notes that, in the event that such a merger is executed, the resulting automotive concern (New Fiat) would be among the world’s largest OEMs as combined sales in the range of six to seven million units would rank only behind Toyota Motor Corporation and roughly on par with Volkswagen AG. This would provide New Fiat with the requisite scale to compete more effectively on a global basis.

DBRS notes that many details of the proposed merger remain to be addressed, including antitrust approvals. With respect to required financing, European countries where Fiat and GM Europe have plants are likely to be requested to provide guarantees in support of the debt of New Fiat. Furthermore, it is possible that Fiat Group Automobiles would be spun off from Fiat. As such, New Fiat would likely be a purely automotive concern.

Unlike the acquisition of Chrysler in isolation, DBRS notes that the transactions resulting in New Fiat, if completed, could lead to rating actions. Any rating action would depend on many factors, including but not limited to the resulting business profiles, capital structures and the financial profiles of both New Fiat and Fiat. DBRS will monitor the progress of Fiat’s actions regarding the expansion of its automotive activities and will provide commentaries and/or new rating actions when appropriate.

Notes:
The applicable methodology is Rating Automotive, which can be found on our web site under Methodologies.

This is a Corporate rating.