DBRS Confirms Fiat S.p.A. at BB (high), Trend Negative

DBRS has today confirmed the Issuer Rating of Fiat S.p.A. (Fiat or the Company) at BB (high). Concurrently, pursuant to DBRS’s Rating Methodology for Leveraged Finance, in-line with the assessed recovery rating of RR4, the instrument rating of Fiat’s Senior Unsecured Debt is also herein confirmed at BB (high). (The BB (high) Senior Unsecured Debt rating of Fiat Finance Canada Ltd. recognizes the unconditional guarantee of the Company.) The ratings confirmation incorporates ongoing weak performance of Fiat’s European automotive operations, considerably offset by profitability in Latin America, notably Brazil, which has become Fiat’s largest market. DBRS notes that Brazil has responded favourably to government incentives (which were introduced in May and are expected to persist through October), with 2012 industry sales projected to increase by approximately 8% year-over-year, considerably benefiting Fiat, which is the market leader. The trend on the ratings remains Negative, as DBRS does not expect a meaningful recovery in European auto industry over the near term, with difficult conditions expected to persist for at least the next two years. Moreover, conditions in Brazil may also deteriorate materially upon the expiration of the current government incentives due to prevailing economic headwinds as well as significantly increased competition in the region as a function of the entry or capacity additions of several auto manufacturers.

DBRS acknowledges that Fiat’s current credit metrics (primarily analyzed on a stand-alone basis) are weak for the assigned ratings; however, this is partly offset by DBRS’s more positive view of the Company’s business profile, which is analyzed on a combined basis (i.e., including the operations of 58.5%-owned Chrysler Group LLC (Chrysler)). DBRS notes that the addition of Chrysler has considerably bolstered Fiat’s business profile, with significant geographic and product diversification benefits (along with associated exchanges of platforms and technologies). Moreover, scale efficiencies through joint purchasing activities and higher capacity utilization bode well for the Company’s cost structure going forward.

However, despite the consolidation of Chrysler (as of June 2011), Fiat and Chrysler currently manage funding matters on a largely independent basis. Fiat offers no guarantee or formal support of Chrysler’s financial obligations; similarly, Chrysler has no guarantee, support or similar obligations with respect to any Fiat financing obligations. Moreover, documentation pertaining to financing transactions of each of Fiat and Chrysler significantly restricts any financial support from one company to the other. From Fiat’s perspective, Chrysler is limited in its ability to provide funding to Fiat, including dividends (apart from $500 million and subject to certain pro forma liquidity tests). Accordingly, DBRS assesses Fiat’s financial profile on an independent basis (i.e., excluding Chrysler). DBRS notes that Fiat’s current financial metrics excluding Chrysler are weak for the assigned ratings. DBRS observes, however, that Fiat’s current liquidity position (as of June 30, 2012) on a stand-alone basis is solid, totalling EUR 12.1 billion that consists of EUR 10.2 billion in cash and EUR 2.0 billion in available (undrawn) committed credit lines.

The Company’s 2011 performance, excluding Chrysler, was essentially flat year-over-year, with moderately weaker performance of Fiat Group Automobiles essentially offset by considerably improved performance of the Company’s components business, as well as by moderately higher earnings of luxury brands Ferrari and Maserati. Chrysler’s performance through the last seven months of 2011 improved significantly, given increases in volumes, firmer product mix and achieved pricing gains. Through the first half of this year, Fiat’s performance, excluding Chrysler, weakened significantly in-line with ongoing challenges in Europe. This was partly offset by ongoing profitability in Latin America, although earnings in this region moderated also somewhat year-over-year due to lower volumes and softer product mix (DBRS expects the weaker performance through the first six months of the year to be significantly recaptured in the final half of the year due to the aforementioned government incentives). DBRS notes that the majority of consolidated earnings through the six-month period ending June 2012 was represented by Chrysler, which continued to trend positively amid the ongoing recovery of automotive conditions in the United States, bolstered by the solid market performance of new or enhanced models, notably the Jeep Wrangler and the Chrysler 300. DBRS also notes that Fiat is progressively expanding in the Asia Pacific region largely through Chrysler Group vehicles; DBRS views this positively but still considers these efforts to be at an early stage.

The negative trend of the ratings highlights the significant challenges facing both Fiat and Chrysler. Regarding Fiat, industry conditions in Europe are likely to remain difficult over the near term with delayed product launches possibly leading to market share declines, which could further adversely impact results. Moreover, while indications have thus far been promising, DBRS notes that the Company still faces significant execution risk with respect to the further integration of Chrysler. If Fiat is able to sustain significant profitability in Latin America such that that it weathers 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. However, if the Company’s profitability in South America were to deteriorate such that it would not sufficiently offset the weak performance in Europe, a downgrade in the ratings would likely result. 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:
All figures are in Euros unless otherwise noted.

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 Companies in the Automotive Industry (April 2011), which can be found on our website under Methodologies.