DBRS Confirms CNH Global and Case New Holland at BBB (low)

DBRS has today confirmed the Senior Unsecured Debt ratings of CNH Global N.V. and Case New Holland Inc. (collectively, CNH or the Company) at BBB (low). The confirmation reflects CNH’s improved financial metrics in 2011 to levels more consistent with the ratings, supported by favourable demand conditions in its equipment operations. CNH is currently 88% owned by Fiat Industrial S.p.A. (FI) and DBRS considers FI’s ownership to be neutral to CNH’s ratings as the remaining shares are held by public shareholders and it remains unlikely that the Company would dividend substantial funds to FI.

DBRS also notes that there has been a recent proposal by FI to CNH’s board to acquire the remaining CNH shares and combine all operating companies of FI under a new company to be formed and listed. The proposed combination, if accepted by CNH’s board, is targeted for completion before the end of 2012. At this point, DBRs does not expect the transaction to have any imminent effect on CNH’s rating as there is no indication that it will result in material changes to CNH’s business strategy and operations or to its financial risk profile. If CNH’s board accepts the proposal and more details emerge from FI’s plan that indicate any such material changes, DBRS will review the potential impact on CNH’s rating at that time. In the longer run, DBRS expects that the proposed transaction could possibly benefit CNH by facilitating closer coordination and cooperation between FI’s operation units (e.g., rationalization of sales forces and financing operations with Iveco S.p.A. and cooperation in powertrain technologies and production with FPT Industrial).

The ratings reflect CNH’s sound business profile given its position among the global leaders in agricultural equipment (AG) in addition to being a major manufacturer of construction equipment (CE). The confirmation also reflects the improving coverage metrics of the Company’s industrial operations (after certain adjustments, outlined below) and sound liquidity position, with access to capital markets being readily re-established over the past couple of years. The trend on the ratings is Stable, in line with DBRS’s opinion that the Company’s operating performance has already improved to match pre-recession levels and that most of the Company’s end-markets are expected to improve, albeit at a slower pace, over the near to medium term.

CNH’s Equipment Operations division is involved in the manufacturing and servicing for AG and CE, the two major product segments, which contribute approximately 80% and 20%, respectively, of total revenue, while its Financial Services division provides captive-finance support to its core business. Despite its focus on two product segments, the Company’s business risk profile is mainly supported by market leadership in the more stable AG segment and good business diversity (mainly through worldwide geographic diversification and a comprehensive range of products that serve the diverse needs of customers in different regional markets) in both segments. Its much larger AG segment enjoys a particularly strong market position in all core regions, being among the top two manufacturers, with John Deere and AGCO Corp. as its main competitors. Furthermore, the long-term fundamentals in AG remain positive as global population growth and increasing affluence in developing countries will necessitate higher crop production, which in turn supports AG equipment demand.

However, this is partly offset by the relatively higher business risk facing CNH’s smaller CE segment. The segment faces more cyclical and competitive markets as demand is correlated to cyclical construction activities, which in turn are sensitive to economic conditions and government infrastructure spending. CE’s market position is also relatively weaker, generally among the top ten manufacturers in key markets, with more intense competition from large global players (e.g., Caterpillar, Komatsu and Volvo) and small regional manufacturers (especially in developing markets).

DBRS notes that the operating results that started to recover in 2010 (from the 2009 recession) have strengthened further in 2011. The Company’s revenue and EBITDA in 2011 marginally exceeded the pre-recession levels in 2008. The improvement reflected strong demand conditions in AG equipment, particularly in higher-powered tractors and combines sold at higher unit prices during the year. CE segment revenue also benefited from demand recovery and successful new product launches. CNH’s competitive position has been holding firm as global market share remained steady in both segments. DBRS expects CNH’s revenue growth in 2012 to moderate somewhat, reflecting the impact of fragile economic and fiscal conditions in Europe and a possible slowdown in economic growth in developing markets in Asia.

With strong revenue and EBITDA in 2011 and relatively flat debt levels, DBRS considers CNH’s current coverage-based credit measures for its Equipment Operations division to be more comfortably within the assigned rating ranges. The Company’s debt-to-EBITDA ratio was 2.3 times (x) for the last twelve months ended March 31, 2012, compared with 3.9x in 2010, while cash flow-to-debt improved to 29% from 20% during the same period. CNH’s capital structure remains strong, with debt-to-total capital of 35%. In evaluating CNH’s financial risk profile, DBRS also takes into consideration that a portion of Equipment Operations debt is used to support the Financial Services division through intersegment notes receivable. The Company has also borrowed from FI, its parent, although the amount has become more modest since 2010. Both amounts are currently more than offset by CNH deposits in FI’s cash management pools. After adjusting for these two items, DBRS observes that leverage of the Equipment Operations division is modest, with total adjusted debt-to-total capitalization of 22%, with a substantial net cash position of $2.0 billion as of March 31, 2012.

DBRS notes that CNH’s liquidity has returned to a healthy level, with substantial cash resources readily available to cover its near-term cash uses. As at March 31, 2012, the Equipment Operations division had cash balances and deposits with FI totalling $4.8 billion, in addition to its expected operating cash flow of about $1.3 billion per year. This is more than adequate to cover its short-term debt of $826 million and other operating and capital spending needs for the year. CNH’s Financial Services division relies on asset-backed securities and factoring markets to provide a substantial proportion of its funding needs. While we understand that the division is seeking to diversify its funding sources (having closed a bond issue and two committed credit lines in the past eighteen months), DBRS believes that such reliance exposes the division to potential disruption of these funding markets and, if that happens, the Financial Services division may require liquidity support from either Equipment Operations or FI.

DBRS expects the ratings to remain stable over the near to medium term, while we continue to monitor developments related to the recent proposed combination with FI. We do not anticipate a weaker competitive position or higher financial leverage for CNH; however, in the event that the proposed combination leads to changes that result in a materially higher risk appetite, such changes could result in negative rating action.

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.