DBRS Places CNH Global N.V. and Case New Holland Inc. at BBB (low) Under Review-Negative

DBRS has today placed the Issuer Rating of CNH Global N.V. (CNH or the Company) and the Senior Unsecured Debt ratings of CNH and Case New Holland Inc., both at BBB (low), Under Review with Negative Implications. The rating action reflects the potential impact on CNH’s business risk and financial risk profiles of the impending completion of its merger with its current 88% shareholder, Fiat Industrial S.p.A. (FI), expected to be completed in the third quarter of 2013. The merged entity is to be renamed CNH Industrial N.V. (Newco) with equity listing in the United States and Italy. Newco will in turn hold all equity in the operating companies including CNH, Iveco S.p.A. (Iveco, a truck and commercial vehicle manufacturer) and FPT Industrial S.p.A. (a powertrain manufacturer).

DBRS has so far considered FI’s ownership 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 believes that after the merger, CNH and FI’s other businesses are likely to have a higher degree of business and financial integrations. As such, DBRS will assess Newco’s consolidated operations and financial profiles in its rating assessment after the merger completion, in accordance with its methodology Rating Holding Companies and Their Subsidiaries.

DBRS recognizes that the proposed merger could ultimately benefit CNH’s business profile in the longer run through closer coordination and cooperation between FI’s operation units. However, DBRS believes the proposed merger could also expose CNH to the weaker business profile of Iveco, which is more exposed than CNH’s core agricultural equipment (AG) business to intense competition and weak market conditions in Europe. In addition, FI’s consolidated financial profile (which will be assumed by Newco) is weaker than CNH’s because of the additional debts FI borrows to support the non-CNH industrial businesses. DBRS’s review will assess Newco’s business strategic directions in its different business segments, financial policies and financing arrangements, as and when they become more clearly defined. Upon completion of the review and based on the findings, DBRS expects CNH’s ratings to potentially be lowered by one notch or to be confirmed. In the remainder of this report, DBRS will focus on CNH’s own business and financial risk profiles.

Operationally, CNH’s AG segment, where the Company is among the global leaders with strong geographic diversification, continues to benefit from favourable demand conditions. This has supported the Company’s earnings and cash flow and we expect CNH to maintain financial metrics for its Equipment Operations division (after certain adjustments, outlined below) at current levels, which are consistent with the ratings. This is partly offset by the more challenging operating conditions facing its construction equipment (CE) segment and the revenue impact of weak economic conditions in Europe. DBRS also recognizes that CNH’s sound liquidity position and access to capital markets also support the ratings.

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. Since the economic recession in 2009, the AG segment has effectively contributed to more than 90% of CNH’s operating profits. The segment is more stable with revenue supported by good geographic diversity, a comprehensive product range, as well as strong long-term demand fundamentals (due to steadily increasing food demand as population and income continue to grow in developing countries), firm food prices and increasing farmer income. CNH enjoys a strong market position in all core regions, with leading market shares along with John Deere & Company and AGCO Corp., its two main competitors.

However, the Company’s strengths in the AG segment are partly offset by the relatively higher business risk facing CNH’s smaller CE segment. The segment faces more volatile 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 Inc., Komatsu Ltd. and Volvo AG) and small regional manufacturers (especially in developing markets). Previously anticipated demand recovery for the CE market was not sustained after the strong first quarter of 2012. Despite improvement in housing starts in the United States, the CE market has experienced declining demand in all regional markets as a result of the continued economic weakness and fiscal spending austerity in Europe as well as slower growth in the emerging economies in Asia. As the outlook for the CE market remains uncertain and competitive pressure is likely to limit any pricing flexibility in the medium term, DBRS expects CNH to continue focusing on managing its production costs and inventory levels in the CE segment while striving to maintain market share.

Overall operating results for CNH’s Equipment Operations division for 2012 remained satisfactory, as continued revenue growth and an improving operating margin in the much larger AG segment, more than offset weakness in CE. Debt reduction was relatively modest during 2012 as much of the operating cash flows were deployed to support expansion of production capacity in faster growing emerging countries in Asia and South America, dividend payment (the first since 2008, including a special dividend in connection with the proposed merger) and the growing loan receivable portfolio in the Financial Services division. Nevertheless, financial metrics improved further because of increased cash flow and EBITDA and lower total debt level due partly to translation reflecting a stronger U.S. dollar. Total debt-to-EBITDA improved to 2.1 times (x) in 2012 from 2.5x in 2011 and cash flow-to-debt strengthened to 29% from 26% during the same period. In the first quarter of 2013, CNH’s cash flow and earnings remained supported by steady growth in the AG segment and, despite further weakening in the operating conditions of the smaller CE segment, the Company was able to maintain its financial metrics for the last 12 months (LTM) ended March 31, 2013, similar to their 2012 levels. DBRS considers these metrics to be comfortably within CNH’s rating ranges and expects them to maintain at a similar level for the remainder of 2013. Comparatively, FI’s consolidated financial metrics (for its Industrial Activities operations) were weaker, with total debt-to-EBITDA of 3.7x and cash flow-to-debt of 18% for LTM March 31, 2013. CNH’s capital structure remains strong, with debt-to-total capital of 33% (compared to FI’s 62%).

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, 2013, CNH’s Equipment Operations division had cash balances and deposits with FI totaling $5.0 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 $1.5 billion 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 through access to bond markets and substantial credit facility arrangements, 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.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.