DBRS Upgrades Chrysler Financial Services Americas LLC to CCC, Trend Stable

DBRS has today upgraded the ratings of Chrysler Financial Services Americas LLC (Chrysler Financial or the Company), including the Issuer Rating to CCC from “C”. Further, DBRS has upgraded the ratings of the Second Lien Credit Facility to “B” from “C” and has withdrawn the ratings on the First Lien Credit Facility, which has been repaid in full. Concurrently, DBRS has removed all ratings from Under Review with Negative Implications, where they were placed on April 30, 2009. The trend on all ratings is Stable.

DBRS’s ratings of Chrysler Financial reflect the improving financial profile, namely the improved capitalization, significantly reduced debt levels and the sound credit risk and servicing capabilities of the Company. The ratings however, are constrained by the still limited funding profile and uncertainties regarding the Company’s evolving business plan and its future prospects as it endeavors to grow new lending in the sub and near-prime auto space and to a lesser extent, into mid-market commercial lending.

The ratings consider Chrysler Financial’s weakened franchise. As such, DBRS sees re-establishing a solid franchise a key task and significant challenge. Since the April 2009 bankruptcy filing of Chrysler LLC (Chrysler Auto), and the rejection of the OEM (original equipment manufacturer) contract, the Company’s ability to originate new loans has been reduced as Chrysler Financial no longer has an OEM partner to provide a steady source of loan volume. Given the lack of volume, management, instead, prudently focused on maximizing the value of the legacy loan book while operating the Company as a going concern. Indeed, since April 2009, the balance sheet has been reduced, a sizeable amount of debt repaid, and, in 2009, the Company returned to profitability. DBRS views the aforementioned achievements, in the current difficult environment as demonstration of the solid crisis management and the acumen of management.

Going forward, Chrysler Financial needs to reestablish its franchise so that it can protect the longer-term prospects of the entity. To this end, the Company intends to transform its business model from a captive auto finance company to a market based lending model primarily focused on lending to sub and near-prime borrowers of both the new and used vehicles. While DBRS sees the positive merits of the plan, it is not without risks. The business model is not yet proven, the company will face increased exposure to borrowers with higher risk profiles and the auto financing market is quite competitive. Moreover, the Company has yet to develop a following of dealers to provide a steady flow of new business. Success in mitigating these risks and a proven ability to achieve the proper balance between risk and return can lead to positive ratings momentum.

Profitability has improved. Chrysler Financial’s results over the past four quarters have benefited from the robust recovery in the used vehicle markets. Earnings have also benefited from good cost control and lower provisioning levels as credit performance improved. Nonetheless, the Company’s earnings power has been reduced by the lack of originations. Revenues continue to decline as the legacy portfolio runs-off. As such, DBRS sees generating adequate revenue to support the infrastructure required to sustain the balance sheet and the core operations as a critical near-term challenge. DBRS will look to the Company’s ability to achieve appropriate risk based pricing.

DBRS views the solid credit performance of the loan book as reflecting sound risk management and servicing capabilities. However, the strong used vehicle market certainly has played a part. During 2Q10, credit performance in the U.S. serviced retail loan and net lease portfolios continued to evidence favorable credit trends. DBRS expects solid asset quality measures in the legacy books well into 2011, given the portfolio seasoning. Going forward, however, as the Company builds a book of non-prime automotive loans, DBRS anticipates that credit metrics will migrate higher reflecting the shifting composition in the loan book to the more risky borrower profile. Nevertheless, given Chrysler Financial’s risk management acumen and history of underwriting loans to this market sub-segment, DBRS expects credit risk will be properly managed.

Funding remains limited and the Company continues to be reliant on secured sources of financing. DBRS sees the shifting of the funding model as a longer-term evolution. The Company has made dramatic strides in reducing overall debt levels since year-end 2008, paying down ABS and corporate debt. Capital has improved significantly as the ongoing deleveraging of the balance sheet continues to generate significant levels of capital. DBRS recognizes the quite sizable earnings retention, reflecting the prudent actions of management.

Consistent with DBRS’s methodology for rating secured instruments, DBRS rates the Second Lien Credit Facility three notches above the Issuer Rating. The notching reflects DBRS’s view that recovery, in the case of default, will be greater than 90%. The high-recovery postulation considers the overall quality of the assets and the values of the assets. Indeed, at June 30, 2010, coverage was sound on the Second Lien Facility at 3.7x. Moreover, coverage has improved since quarter-end given the $600 million debt repayment on the Second Lien Facility post quarter-end.

The Stable trend reflects DBRS’s expectations that the Company will continue to face headwinds as it restores and redefines its franchise. Moreover, while DBRS sees the Company as having the pedigree to manage its new lending ventures, only proven execution over time will confirm this view. Positive rating momentum could result should Chrysler Financial have success in strengthening the franchise, improving earnings generation, and further diversify funding, while maintaining asset quality metrics within expectations.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable rating methodology is Rating Auto Finance Companies in the United States, which can be found on our website under methodologies.