DBRS Confirms Fiat S.p.A. at BBB (low), Trend 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). The trend remains Negative, reflecting strong headwinds facing the Company with severe market conditions (exacerbated by the global financial crisis) prevailing across most of its businesses. However, DBRS also recognizes that Fiat has taken several countermeasures to help moderate the negative impact of the downturn, with the Company continuing to enjoy a satisfactory liquidity position.

Fiat’s 2008 results showed moderate improvement over 2007. However, this was largely attributable to strong first half results, as the performance in the second half of the year slowed sharply as a result of the economic downturn. This trend continued in 2009, with the Company incurring a net loss of EUR410 million in the first quarter, with each of Fiat’s major businesses generating much weaker results year-over-year. The Company’s financial profile was particularly negatively affected by the significant use of working capital (EUR3.8 billion) last year, in addition to higher capex levels to support powertrain investments of Fiat’s automotive division (FGA). As a result of the above, Fiat’s net industrial debt-to-capitalisation increased to 38% as of March 31, 2009, relative to a modest net cash position recorded as of year-end 2007.

However, DBRS notes that Fiat has executed several cost containment measures including temporary layoffs and plant shutdowns to help moderate the negative effects of the downturn. FGA has also benefited from the introduction of various vehicle scrappage incentive programs being implemented in many markets. These have notably raised industry volumes, particularly small cars, which has therefore also resulted in increased market share for Fiat. The Company’s agriculture and construction segment (CNH, rated BBB (low) - Negative) faces moderately softening demand in agricultural equipment; however construction activity levels are expected to remain severely depressed until the last quarter of this year when various governmental stimulus actions begin to take effect. Fiat’s truck division (Iveco) faces perhaps the most difficult environment with all truck segments and geographic markets being at very weak levels that are expected to persist though the end of this year.

Notwithstanding the recent weak results and increased leverage of the industrial operations, DBRS notes that Fiat has been able to maintain a sound liquidity position. In the first quarter of 2009, the Company obtained a new EUR1 billion revolving credit facility. More recently, Fiat also received a EUR400 million loan this month from the European Investment Bank toward the development of more fuel-efficient vehicles. Additionally, CNH has regained access to the asset-backed securitization (ABS) market (including a $1 billion Term Asset-Backed Loan Facility (TALF) eligible transaction closed in the second quarter) and recently repaid a $500 million bond issue. As a result, Fiat’s capital market obligations through March 2010 total approximately EUR1.3 billion, which is well manageable. The remaining debt due (EUR3.6 billion) is in the form of loans with Fiat’s core relationship banks and, as such, is ultimately expected to be rolled over.

The Company’s financial profile should also partially recover over the remainder of the year. Excluding Iveco and construction equipment, Fiat’s segments are expected to show a moderate improvement in performance as markets begin to recover; full year 2009 operating earnings are projected to be modestly positive. Additionally, capital expenditures should be significantly lower (i.e., below EUR4 billion) this year with shareholder-friendly initiatives such as dividends and share repurchases also being curtailed. Finally, as Fiat ultimately aligns its production with prevailing demand levels, the working capital absorption should be reversed, resulting in a significant infusion of cash for the Company. These actions are expected to result in a meaningful reduction in leverage of the industrial operations by the end of the year.

Fiat has now also assumed control of Chrysler Group LLC (Chrysler), which has emerged from bankruptcy proceedings. From DBRS’s perspective, it was critical that Fiat was able to complete the transaction without providing any funding as automotive OEMs and suppliers seek to preserve liquidity amid severe industry conditions. While DBRS recognizes the potential benefits in terms of product and geographic market diversification, it also notes that there remains significant execution risk, particularly with respect to consumer acceptance of the new Fiat and Chrysler products that will eventually be introduced in the United States. Additionally, there is integration risk related to the melding of two considerably different corporate cultures. However, with approximately $6.6 billion in “exit financing” provided by the U.S. government, Fiat’s acquisition of Chrysler is not expected to adversely impact its financial profile in the near term. However, DBRS further notes there still remain some uncertainties regarding the Company’s intentions with respect to Adam Opel GmbH (Opel); an acquisition of an equity interest in Opel could potentially have a negative effect Fiat’s financial profile, depending on the eventual structure of such a transaction.

The trend on the ratings could be changed to Stable should markets rebound across most of Fiat’s businesses and the Company’s financial profile begins a positive recovery that DBRS would consider sustainable. However, in the event that losses persist and continue to adversely impact Fiat’s credit metrics, this would likely lead to negative rating actions.

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.