DBRS Downgrades Fiat S.p.A. to BB (high), Trend Negative

DBRS has today downgraded the Senior Unsecured Debt rating of Fiat S.p.A. (Fiat or the Company) to BB (high) from BBB (low). The downgrade reflects DBRS’s assessment of Fiat’s business profile as a stand-alone automotive company, while also incorporating the Company’s increasing ownership of Chrysler Group LLC (Chrysler), which now clearly represents a core component of Fiat’s business strategy. While Chrysler serves to enhance the Company’s product and geographic diversification (albeit still within the automotive sector), DBRS notes that significant integration risks persist, with Fiat potentially exposed to material additional financial obligations through its ownership of Chrysler. The trend on the ratings is Negative, reflecting significant headwinds in Fiat’s core European automotive market as well as ongoing challenges associated with several forthcoming product launches across major automotive markets. Concurrent with the downgrade and pursuant to DBRS’s Rating Methodology for Leveraged Finance, DBRS has assigned an Issuer Rating of BB (high) to the Company, with associated recovery and instrument ratings of Fiat’s senior unsecured debt being assessed at RR4 and BB (high), respectively. (The BB (high) senior unsecured debt rating of Fiat Finance Canada Ltd. reflects the unconditional guarantee of the Company). With these rating actions, Fiat is removed from Under Review with Negative Implications, where it was placed on July 22, 2010.

The 2010 results of Fiat’s continuing operations following the Demerger moderately improved year-over-year, although operating margins remained weak relative to the automotive industry average. The lacklustre results reflect challenging conditions in Fiat’s core European market, where (notwithstanding significant variances across nations) aggregate industry volumes declined by approximately 5%. This was exacerbated by share losses, mostly attributable to materially lower demand for compressed natural gas (CNG) vehicles, where the Company is particularly strong. Partly offsetting the above was ongoing solid performance in the Brazilian market, where Fiat retained its leadership position, as well as a sharp increase in light commercial vehicle (LCV) volumes.

In 2011, the Company has been progressively increasing its ownership position in Chrysler from an initial level of 20% to the current stake of 53.5% (on a fully-diluted basis), with this likely increasing to 58.5% by year-end. DBRS notes that Chrysler has become an integral component of the Company’s business strategy. Chrysler not only represents a foray into the important North American market (from which Fiat has long been absent), Fiat is also depending on Chrysler-derived products to complement the product portfolios of the Lancia and Fiat brands. DBRS recognizes that, despite the consolidation of Chrysler, Fiat and Chrysler currently manage funding matters on an independent basis, with the Company offering no guarantee or formal support of Chrysler’s financial obligations; (DBRS notes that per Fiat’s credit documentation Chrysler is ring-fenced, with the latter’s debt maturity schedule also being very favourable). However, given how strategically important Chrysler has become to Fiat, DBRS considers it likely that the Company would provide some level of financial assistance to Chrysler if needed. DBRS notes that Fiat’s current financial metrics excluding Chrysler are consistent with the BB rating range, with the potential of further funding assistance toward Chrysler firmly entrenching the newly assigned ratings.

The negative trend of the ratings highlights the significant challenges facing both Fiat and Chrysler. Regarding Fiat, industry volumes in Europe and the Company’s native Italy are at the lowest levels since the late 1990s, with similar sales numbers expected to persist to the end of the year. The Company is hoping to reverse its market share loss through recent and forthcoming launches of products, some of which are derived from Chrysler. With respect to Chrysler, it revised numerous models in late 2010 and has performed reasonably in the U.S. market through the first six months of this year amid a moderate recovery of the industry. However, Chrysler is currently in negotiations with the United Auto Workers (UAW) concerning a new labour agreement and still faces many significant product launches under its new ownership (with successful market acceptance remaining uncertain). If Fiat (and by extension Chrysler) is able to weather the above-cited headwinds without incurring significant losses or experiencing further deterioration in its financial profile, the trend on the ratings could be changed to Stable. DBRS notes that any indication of Fiat’s intent to acquire the UAW Voluntary Employee Beneficiary Association (VEBA) stake in Chrysler would 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 methodologies are Rating Companies in the Automotive Industry and DBRS Rating Methodology for Leveraged Finance, which can be found on our website under Methodologies.