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

DBRS has today downgraded the Issuer Rating of Fiat S.p.A. (Fiat or the Company) from BB (high) to BB. Concurrently, pursuant to DBRS’s Methodology regarding Recovery Ratings for Non-Investment Grade Corporate Issuers, the instrument rating of Fiat’s Senior Unsecured Debt is also herein downgraded to BB, in-line with the assessed recovery rating of RR4. (The BB Senior Unsecured debt rating of Fiat Finance Canada Ltd. recognizes the unconditional guarantee of the Company.) The ratings downgrade incorporates the continued deterioration of Fiat’s financial profile on a stand-alone basis (i.e. excluding Chrysler) primarily as a function of persistent (albeit recently moderating) losses in Europe amid a significant investment program associated with the Company’s forthcoming assembly plant in Brazil (in addition to ongoing product development). The trend on the ratings remain Negative; significantly reflecting the challenges and potential cash outlays involved with Fiat’s continuing pursuit of Chrysler Group LLC (Chrysler) in addition to ongoing expected weak earnings performance (and associated cash burn) of the Company (on a stand-alone basis). Moreover, DBRS notes further that Brazil, (which represents stand-alone Fiat’s largest national market), faces some economic headwinds, (although automotive sales continue to benefit from government tax incentives that are currently slated to persist through the end of 2013).

The Company’s 2012 performance,(excluding Chrysler), continued to deteriorate year-over-year amid ongoing losses in Fiat’s native Europe, Middle East and Africa (EMEA) segment reflecting ongoing severe conditions in Europe, with such exacerbated by the Company’s over-weighted exposure to the southern markets that have been the most adversely impacted by the continent’s economic challenges. Profitability from the Latin American (LATAM) segment was also weaker, although earnings improved notably in the second half of 2012 following the reintroduction of government stimulus measures in May 2012. While earnings of Fiat’s luxury brands Ferrari and Maserati improved year-over-year, this was essentially offset by weaker performance of the Company’s components segment. Through the first half of 2013, Fiat’s performance excluding Chrysler improved marginally year-over-year, but remained weak with the Company continuing to incur a net loss of approximately EUR 500 million. Losses in the EMEA segment however narrowed significantly as a function of ongoing cost reductions and a higher product mix mostly attributable to the introduction of the Fiat 500L compact utility vehicle. In the LATAM segment, profits were moderately lower, although volumes remained firm with the reduced earnings mostly a function of adverse foreign exchange effects (in addition to some increases in industrial costs attributable to production shifts in response to the region’s current trade barriers). 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. On a consolidated basis, DBRS notes that the majority of earnings in recent periods have been represented by Chrysler, which continues to trend positively primarily as a function of stronger retail sales and firmer pricing amid the ongoing recovery of automotive conditions in the United States, bolstered by the solid market performance of new or enhanced models.

DBRS acknowledges that Fiat’s current credit metrics (primarily analyzed on a stand-alone basis) continue to be somewhat weak for the assigned ratings. However, DBRS notes that the Company’s financial measures are unlikely to deteriorate further with earnings progressively recovering going forward, albeit a protracted rate. Moreover, the weak credit metrics are 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). 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 an independent basis. Accordingly, DBRS assesses Fiat’s financial profile on such basis (i.e., excluding Chrysler).

Fiat is continuing to pursue an increasing ownership position in Chrysler and over the past twelve months has exercised three call options to purchase a combined additional 9.9% equity interest in Chrysler from the UAW Voluntary Employee Beneficiary Association (VEBA). However, the VEBA has disputed Fiat’s calculation of the call price. The dispute has been submitted to the Delaware Chancery Court with the timing regarding a ruling remaining uncertain; (while a final ruling has yet to be made, DBRS notes that the Delaware court has granted Fiat judgment on the pleadings of two of the most significant issues). Fiat remains in negotiation with the VEBA over the latter’s 41.5% equity interest in Chrysler. Eventually, an initial public offering (IPO) of Chrysler may serve as a benchmark to value Chrysler’s stock, although an IPO (if at all executed) is unlikely before early 2014. In any event, DBRS notes that Fiat’s ultimate aim is to attain full ownership and control of Chrysler. In the interim, Chrysler revised its term loan and revolving credit facilities in June of this year, such that the conditions of these financings more closely match those of its bond agreements. As a result of the above, while Chrysler still remains significantly ring-fenced, Fiat’s access to Chrysler’s cash has somewhat increased, with the Company being potentially able to access close to $1.7 billion of Chrysler’s cash.

While the cash burn of Fiat (on a stand-alone basis) was substantial in 2012 at EUR 2.8 billion (as calculated by DBRS), DBRS notes that this is expected to moderate significantly in 2013. Liquidity of the industrial operations of (stand-alone) Fiat as of June 30, 2013, was fairly solid at EUR 10.9 billion (including available credit lines). As noted previously, the Company would also potentially be able to access approximately EUR 1.25 billion from Chrysler in the near-term. However, Fiat’s liquidity stands to be significantly depleted depending on how much the Company would eventually have to pay in order to attain full ownership and control of Chrysler. DBRS notes that the estimates of such payments vary substantially (depending on the ruling of the Delaware Chancery Court as well as other measures Fiat may pursue) and roughly range from $2 billion to $6 billion (as estimated by DBRS). DBRS notes further that even in the event of full ownership / control, Fiat’s access to Chrysler’s cash could remain restricted, pending the prepayment or renegotiation of the latter’s various financings.

The Negative trend on the ratings underscores the ongoing weak projected performance of Fiat, excluding Chrysler, over the near-term, combined with significant uncertainties associated with Fiat’s increasing ownership position. In the event that the Company (on a stand-alone basis) reverts to at least breakeven free cash flow that is deemed sustainable, the trend on the ratings could be changed to Stable. Notwithstanding the Negative trend, DBRS notes that any substantial development with respect to Fiat’s efforts in acquiring VEBA’s stake in Chrysler would likely trigger an event-driven review of the ratings.

Notes:

All amounts are in Euros unless otherwise specified.

Rating on Fiat Finance Canada Ltd. is based on the parent and guarantor, Fiat S.p.A.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Automotive Industry, which can be found on our website under Methodologies.