DBRS Comments on Fiat’s Acquisition of the Residual 41.5% Equity Interest in Chrysler

DBRS today notes that on January 1, 2014, Fiat S.p.A. (Fiat or the Company) announced that it had reached an agreement with the United Auto Workers (UAW) Voluntary Employee Beneficiary Association Trust (VEBA Trust) to acquire all of the VEBA Trust’s equity interest in Chrysler Group LLC (Chrysler), which represented the 41.5% of Chrysler previously not held by Fiat. As a result of the agreement and the forthcoming transaction (expected to close on or before January 20, 2014), Fiat’s ownership of Chrysler would increase to 100%. Currently, DBRS rates Fiat at BB with a Negative Trend (while Chrysler remains unrated by DBRS). While DBRS considers the recent announcement to be moderately positive to Fiat’s credit risk profile, the Company’s ratings remain unchanged at BB with a Negative Trend, reflecting Fiat’s substantial exposure to the European automotive industry that remains at very weak levels (notwithstanding some slight improvement expected in the region in 2014). Moreover, despite Fiat’s pending full acquisition of Chrysler, DBRS notes that the Company, for the time being, remains unable to fully access Chrysler’s cash balances through unrestricted dividend payments as per the existing documentation of Chrysler’s various financings.

The VEBA Trust is to receive $3.65 billion for its equity interest in Chrysler, with such payment consisting of the following:
-- $1.75 billion in cash to be paid by Fiat.
-- Special dividend of $1.9 billion to be paid by Chrysler.
Both Fiat and Chrysler are expected to fund their respective payments from their existing cash balances, with neither company needing to access the equity or debt markets as result of the forthcoming transaction. In addition to the above, Chrysler is also to contribute an additional $700 million to the VEBA Trust in four equal annual instalments of $175 million. In line with these contributions, the UAW has in turn agreed to continue its support of Chrysler’s industrial operations as well as the further implementation of the Fiat-Chrysler alliance across Chrysler’s various manufacturing sites.

DBRS notes that the announcement has a positive impact on Fiat’s business risk profile, with the Company being able to fully benefit from the industrial and commercial integration with Chrysler. As such Fiat, in combination with Chrysler, will represent a global auto manufacturer of a sufficient scale to effectively compete in the automotive industry, where escalating costs linked with product development and tightening emissions legislation render it all the more challenging for modestly sized auto companies to remain viable over the medium to long term.

Notwithstanding the transaction’s positive impact on Fiat’s business risk profile, DBRS notes that the impact on the Company’s financial risk profile currently remains somewhat uncertain. Fiat’s financial risk profile on a stand-alone basis is slightly adversely affected by its forthcoming payment of $1.75 billion, although DBRS notes that this is considerably mitigated in light of the fact that the remaining payments and contributions (totalling $2.6 billion) are to be made directly by Chrysler. Moreover, despite the weak financial risk profile of stand-alone Fiat, its liquidity position is nonetheless quite sound (totalling EUR 10.7 billion as of September 30, 2013) and well sufficient to absorb the forthcoming $1.75 billion payment. However, despite Fiat’s pending 100% ownership in Chrysler, DBRS notes that the Company’s access to Chrysler’s cash still remains ring-fenced as a function of the existing documentation of Chrysler’s various financings that restricts Chrysler’s ability to make dividend payments to Fiat. DBRS notes that Fiat, in light of its forthcoming full ownership of Chrysler, may seek to renegotiate Chrysler’s various financings, although the Company has not made any announcement to date regarding such developments.

As noted previously, Fiat’s ratings remain at BB with a Negative Trend. DBRS expects to reconsider Fiat’s ratings upon the Company’s announcement of its full-year results for 2013, or alternatively pending any further developments with respect to Fiat’s ability to fully access Chrysler’s cash balances.

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

The applicable methodology is Rating Companies in the Automotive Manufacturing Industry (August 2013), which can be found on our web site under Methodologies.

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