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

DBRS has confirmed the Senior Unsecured Debt ratings of CNH Global N.V. and Case New Holland Inc. (CNH or the Company, collectively) at BBB (low). The ratings confirmation reflects CNH’s sound business profile given its position among the global leaders in agricultural equipment in addition to being a major construction equipment manufacturer. The confirmation also incorporates the solid balance sheet of the Company’s industrial operations, (after certain adjustments, outlined below) and much improved liquidity position following facilitated credit access primarily beginning from the latter half of 2009. The trend of the ratings remains Negative, as the Company’s recent results have been weak in line with the cyclical downturn in many of CNH’s key markets, (such as the agricultural equipment markets in North America and Europe as well as global construction equipment ). Additionally, while it appears that the worst of the downturn may have passed, DBRS notes that recovery prospects for the following year remain lacklustre, with industry conditions, notwithstanding some improvement, likely remaining challenging over the near term. . However, the long-term fundamentals of agricultural equipment, (which continues to represent the significant majority of the revenues and profits), remain very positive; growing population and wealth worldwide effectively necessitate higher crop production, which in turn supports stronger demand for agricultural equipment.

CNH’s 2009 full-year earnings were considerably lower relative to 2008, (which, however, was a record year and thus a strong comparable). The weak results reflect moderate contractions in the agricultural equipment industry, exacerbated by a sharp downturn in construction activity. The substantial declines in volumes and mix and associated under absorption costs were only slightly offset by pricing gains and reduced selling, general and administrative (S,G&A) expenses. Accordingly, operating profit was much lower, with the Company incurring a net loss on a consolidated basis. Through the first quarter of 2010, DBRS notes that results have improved year-over-year amid slightly better conditions, although industry volumes in agricultural equipment may decline further this year with construction, notwithstanding some modest growth, remaining poor. As such, DBRS recognizes that the Company’s coverage-based credit metrics will likely remain weak over the near-term.

However, CNH’s balance sheet remains solid. While total indebtedness and gross debt-to-total capitalization appear significant, DBRS notes that the equipment operations borrow substantial amounts for the financial services segment; such sums are effectively set off in the form of intersegment notes receivables. Additionally, the Company sources considerable debt from parent Fiat S.p.A. (Fiat, rated BBB (low) with a Negative trend); however, this is also partly offset by CNH deposits in Fiat’s cash management pools. After adjusting for these two items, DBRS observes that leverage of the equipment operations is modest, with total adjusted debt-to-total capitalization amounting to 9.1% as of March 31, 2010; as of the same date, taking into account all cash balances, the equipment operations have a net cash position.
Additionally, DBRS notes that the Company’s liquidity position has been significantly bolstered the past several months. From mid 2008 through early 2009, CNH’s liquidity was somewhat impeded in line with the global financial crisis that resulted in much-reduced access to the ABS market (that remains a key component of the Company’s funding strategy). However, access to that market has been significantly restored, with CNH closing several financing transactions from mid 2009 onward. As of March 31, 2010, the Company had approximately $9.7 billion in cash, cash equivalents and available credit. Furthermore, while debt sourced from or guaranteed by Fiat increased during the global financial crisis, DBRS observes that such debt has been progressively reducing with CNH able to access the debt and capital markets on an independent basis.

DBRS expects the Company’s performance to improve somewhat in 2010, although profitability will likely remain below historical levels with the agricultural equipment industry possibly softening further this year and construction activity, notwithstanding significant projected growth year-over-over, remaining at weak levels. However, longer term, CNH remains very well positioned to benefit from significant agricultural tailwinds (i.e., rising global population and wealth, which will trigger higher food demand). In the event that performance in 2010 would continue to deteriorate further, this could potentially result in negative rating actions.

On April 21, 2010, parent company Fiat announced a plan to spin off the activities of CNH and Iveco S.p.A. (Iveco – Fiat’s trucking subsidiary), along with the industrial and marine business of Fiat Powertrain Technologies, with the demerged company to be named Fiat Industrial (FI). While the planned demerger would appear to reduce Fiat’s business diversification, this is deemed to be more than offset by the increased autonomy and expected efficiencies of the new structure in the aim of accelerating the growth of both FI and Fiat’s residual automotive business (New Fiat). DBRS notes that many details regarding the planned demerger remain to be resolved, including the eventual capital structure of both New Fiat and FI. Fiat’s Board of Directors is expected to meet in late July of this year 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 Fiat Board of Directors meeting, which is likely to trigger an event driven review of the ratings.

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 the Industrial Products Industry, which can be found on our website under Methodologies.

This is a Corporate (Industrials) rating.