DBRS Confirms CNH at BBB (low) – Trend Remains Negative

DBRS has today confirmed the ratings of CNH Global N.V. and Case New Holland Inc. (CNH or the Company, collectively) at BBB (low), reflective of the Company’s sound business profile as the world’s second largest agricultural equipment manufacturer and a major global producer of construction equipment. The trend remains Negative given the difficult market conditions, particularly in construction equipment, expected to prevail over the near term and which will continue to pressure CNH’s earnings. However, the ratings also incorporate the Company’s sound liquidity position that is bolstered by its parent, Fiat S.p.A. (Fiat), also rated BBB (low) with a Negative trend. While the ratings of CNH and Fiat are not directly tied, there is a meaningful linkage given Fiat’s approximate 89% equity ownership and its implied support of the Company, as Fiat considers CNH to be a core strategic asset.

CNH’s 2008 full-year earnings reached record levels and continued the pattern of significant improvement over several consecutive years. However, in the final quarter of last year, profitability deteriorated as the global financial crisis impeded credit availability in selected markets. Exacerbating this was the sharp weakness experienced in the global construction equipment industry. The slowdown in demand in turn led to a high usage of working capital resulting from significantly higher inventory levels year-over-year. CNH’s debt levels increased substantially, adversely affecting its financial profile.

In addition, the asset-backed securitization (ABS) market, which is normally relied upon as a significant source of funding for the Financial Services segment (particularly in North America and Australia), was effectively closed in the latter part of the year, potentially placing strains on the Company’s liquidity position. However, CNH was able to obtain alternate financing primarily through bank funding (much of which is guaranteed by Fiat) and by tapping intersegment debt, as well as through the issuance of additional notes with Fiat affiliates.

Through the first quarter of 2009, the downturn in the Construction Equipment segment continued, with sales dropping by 59% year-over-year and most production facilities idled. However, as the drop in industry volumes exceeded Company projections, inventory levels declined less than expected and working capital absorption persisted. Agricultural Equipment volumes were also lower, which further adversely impacted profitability (although DBRS notes that negative currency effects also played a significant role in the weaker results of this segment). The total operating margin of the Equipment Operations segment (i.e., excluding Financial Services) was therefore reduced to 1.3% for the quarter (relative to 6.4% generated in the similar prior year period), with a resulting net loss of $126 million.

However, notwithstanding the recent weak results, DBRS notes that in Agricultural Equipment – which historically has represented approximately two-thirds of total sales – fundamentals do remain solid. This, despite some softening in industry volumes anticipated this year given tight credit markets in regions such as Latin America, compounded by adverse weather conditions. In Construction Equipment, volumes are expected to be sharply lower for the year, although sizeable governmental stimulus actions worldwide could possibly initiate a recovery in the final quarter of this year. While earnings are expected to be substantially lower in 2009 than in 2008, DBRS notes that CNH will likely continue to be profitable (albeit at a nominal level), despite severe industry conditions.

Through early 2009, it would seem that the potential strains on CNH’s liquidity have abated. In February, the Company’s $1.2 billion U.S. retail warehousing facility was extended for one year. CNH’s similar Australian facility has also been renewed, and the Company expects to prolong its Canadian facility as well. The ABS market appears to be reopening, with CNH having finalized a new transaction in the amount of $500 million in the first quarter. Also, in the second quarter, a further ABS transaction of $1 billion was closed under the eligibility of the U.S. government’s Term Asset-Backed Loan Facility (TALF) program. Most recently, the Company’s U.S. wholesale conduit facility was increased to $700 million (from $500 million). Finally, CNH expects to generate considerable cash from working capital (primarily through inventory reductions) over the remainder of the year, the proceeds of which are to be allotted toward debt reduction.

In the event that CNH is able to weather the economic downturn without experiencing a material deterioration in its financial profile, the trend on the ratings could be returned to Stable. However, should the Agricultural Equipment business perform under expectations, thereby placing further strains on the Company’s leverage, this would likely lead to negative rating actions.

Notes:
All figures are 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.