DBRS Confirms Fiat at BBB (low), Trend Remains Negative

DBRS has today confirmed the Senior Unsecured Debt ratings of Fiat S.p.A. and Fiat Finance Canada Ltd. (collectively, Fiat or the Company) at BBB (low). The trend remains Negative. The rating confirmation reflects recent operating performance that has proven somewhat resilient (although substantially lower vis-à-vis levels prior to the global financial crisis), with most of the Company’s operating segments (excluding components and production systems) maintaining profitability (albeit significantly reduced) despite the sharp cyclical downturn across the Company’s businesses. Additionally, DBRS notes that the indebtedness of Fiat’s industrial operations was materially reduced in 2009, driven by sound working capital management, in particular a sharp reduction in inventories. The Company also substantially bolstered its liquidity position through additional bank borrowings and bond issues as credit availability improved over the latter half of 2009. However, the trend remains Negative as strong headwinds persist despite indications that the worst of the global economic downturn may have passed, with volumes in many of Fiat’s segments likely remaining significantly below historical norms over the near term. This is particularly true of Fiat’s automotive division (Fiat Group Automobiles (FGA)), with vehicle scrappage incentives implemented across Europe in 2008 and 2009 being mostly phased out this year, which is expected to result in a material drop in industry volumes in that key region. DBRS also notes that substantial planned capital investments, the majority of which are attributable to FGA, may strain the Company’s indebtedness and balance sheet over the near term.

Fiat’s 2009 results were weaker relative to 2008 as operating profit decreased by almost 70% year over year to EUR 1.1 billion, with the Company also incurring a net loss. However, while all business segments were adversely affected by the global economic downturn, DBRS notes that Fiat’s trucking division (Iveco S.p.A.) and the agriculture and construction segment (CNH Global N.V. and Case New Holland Inc. (collectively, CNH), both rated BBB (low) with a Negative trend) attributed the most to the poorer performance. Iveco S.p.A.’s results reflect severe conditions in Europe, although volumes were lower across all truck segments and geographic markets. Regarding CNH, operating profit in 2009 dropped by 75% year over year as volume declines in agricultural equipment were exacerbated by a dramatic drop in global construction activity, with the latter segment incurring an operating loss for the year.

FGA’s 2009 operating margins were also weaker than 2008 and 2007 results. However, this decline in performance was moderated by vehicle scrappage programs across Europe. DBRS notes that industry volume declines on that continent would have been substantially more pronounced in the absence of such incentives, which disproportionately boosted small-car sales given their increased affordability. FGA’s products are strongest in the A segment (mini cars) and B segment (small cars); therefore, Fiat gained market share in many European markets, helping the automotive operations maintain profitability, notwithstanding the challenging industry conditions. However, the scrappage incentives are being phased out this year in most European markets. While FGA’s 2010 first-quarter results were stronger year over year, the Company indicated that its order book was weakening in the second quarter, with Fiat likely being most adversely affected through the end of the year by expected declines in Germany and its native Italian market.

DBRS notes that the Company’s gross free cash flow (before working capital changes) in 2009 was negative in the amount of EUR 1.4 billion, which is in line with reduced profitability, although the degree of negative gross free cash flow was substantially lessened as a result of significantly curtailed expenditures, which totaled EUR 3.6 billion (compared with EUR 5.0 billion in 2008). However, DBRS notes that the Company projects capital expenditures to increase to EUR 4.7 billion in 2010 and EUR 5.8 billion in 2011 (the significant majority of which will be allotted to FGA for increased investments in new product plans and emission-reducing technologies). Furthermore, Fiat also indicated that it plans to reintroduce dividends (EUR 244 million has already been paid this year and, starting in 2011, dividends will be at a level of 25% of net income on a three-year rolling basis, subject to a minimum of EUR 150 million). These items are expected to be partly offset by projected moderate improvements in operating performance, which should prevent a further significant deterioration in Fiat’s financial profile. However, in the event that the Company’s 2010 results prove flat or weaker year over year, this would likely result in negative rating actions.

On April 21, 2010, Fiat announced its plan to spin off the activities of CNH and Iveco S.p.A., along with the industrial and marine business of Fiat Powertrain Technologies, into a demerged company called Fiat Industrial (FI). Strategic objectives of the planned demerger include increased autonomy and higher efficiencies in the aim of accelerating the growth of both FI and Fiat’s residual automotive business (New Fiat). However, DBRS notes that the demerger would appear to reduce business diversification, with volatility in operating performance increasing, thereby adversely affecting the business risk profile. DBRS notes that this could potentially be offset by a stronger financial profile, although the eventual capital structures of both New Fiat and FI are among the many details that remain to be resolved by Fiat’s board of directors, which is expected to meet in late July 2010 to formally review the planned demerger, with execution of the planned transaction (subject to the board’s approval) projected to be completed by late 2010 or early 2011. DBRS expects many details regarding the planned demerger to emerge subsequent to the upcoming board of directors meeting, which is likely to trigger an event-driven review of the ratings. However, DBRS observes that if the eventual financial profile of New Fiat proves to be similar to the Company’s current profile, a rating downgrade would likely result.

Notes:
Fiat S.p.a. of Italy, the parent company for the Fiat Group, unconditionally guarantees Fiat Finance Canada Ltd. debt.

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

This is a Corporate (Autos & Auto Suppliers) rating.