DBRS Downgrades Fiat S.p.A. to BB (low) from BB, Trend Stable

DBRS has today downgraded the long-term ratings of Fiat S.p.A. (Fiat or the Company) to BB (low) from BB. Concurrently, pursuant to DBRS’s methodology “Recovery Ratings for Non-Investment Grade Corporate Issuers,” the instrument rating of Fiat’s Senior Unsecured Debt is also herein downgraded to BB (low), in line with the assessed recovery rating of RR4. The BB (low) Senior Unsecured debt rating of Fiat Finance Canada Ltd. recognizes the unconditional guarantee of the Company. The ratings downgrade incorporates the ongoing deterioration of Fiat’s financial profile amid lacklustre financial performance, exacerbated by outlays associated with the Company’s purchase of the remaining 41.5% ownership interest in Chrysler Group LLC (Chrysler) from the UAW Voluntary Employee Beneficiary Association Trust (VEBA Trust). As a result, Fiat’s credit metrics have migrated to levels below those commensurate with the former ratings. Moreover, while the Company’s 100% acquisition of Chrysler is generally viewed positively by DBRS, DBRS notes that planned financial outlays associated with Fiat’s five-year business plan (that extends through year-end 2018) are expected to effectively preclude any meaningful improvement in the financial profile until 2016; any underperformance vis-à-vis the business plan could potentially delay such improvement even further and possibly lead to an additional increase in the Company’s industrial indebtedness, although DBRS anticipates that any subsequent cash burn would prove moderate. The trend on the ratings is Stable, as DBRS’s view of Fiat’s business profile (analyzed on a combined basis) is somewhat more favourable while also noting that the Company’s liquidity position at this point (despite the weak financial metrics) remains sound.

In January 2014, Fiat reached an agreement with the VEBA Trust to purchase the remaining 41.5% ownership interest in Chrysler. Total consideration for the acquisition amounted to $3.65 billion, consisting of: $1.75 billion in cash paid by Fiat plus $1.9 billion paid by Chrysler (by way of a special dividend). In addition to the above, Chrysler is also to contribute an additional $700 million to the VEBA Trust in four annual instalments of $175 million; (the first of which being already paid). (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.)

As to the merger of Fiat into its 100%-controlled Dutch company, Fiat Investments N.V., which, after the merger will be renamed Fiat-Chrysler Automobiles N.V., shareholders’ approvals were obtained in early August; moreover, it was recently announced by Fiat that payments to be made to dissenting shareholders will total less than the EUR 500 million limit previously set by the Company as a cap to the total amount payable to shareholders exercising cash exit rights and to creditors exercising opposition rights in respect of the merger. The listing of Fiat-Chrysler Automobiles N.V. on the NYSE is currently expected for October 2014.

The above notwithstanding, DBRS notes that Fiat and Chrysler continue to manage financial matters on an independent (though coordinated) basis as per the documentation of the companies’ existing financings, although Fiat nonetheless has access to a limited amount of Chrysler’s cash by way of dividends (in addition to inter-company loans that could be entered into on an arm’s length basis).

In any event, the acquisition of the residual stake of Chrysler has further adversely impacted the financial profile of the Company, both on a combined level as well as on a stand-alone (i.e., excluding-Chrysler) basis. As of June 30, 2014, the balance sheet leverage (i.e. gross debt-to-total capitalization) of the industrial operations of the combined Company and stand-alone Fiat amounted to 74% and 65% respectively, both of which represent aggressive levels (relative to even the newly assigned ratings). Moreover, income- and cash flow based coverage measures are also rather lacklustre, primarily reflecting challenging conditions across some of (stand-alone) Fiat’s key-end markets, notably Europe and also more recently Latin America (primarily Brazil); the financial results of the latter being further undermined by substantial investments associated with the ongoing construction of the forthcoming Pernambuco assembly plant.

Moreover, Fiat’s five-year business plan, which covers the timeframe from 2014 through year-end 2018, outlines what DBRS deems as somewhat aggressive growth plans, (e.g., aggregate annual unit sales increasing from roughly 4.4 million units in 2013 to approximately seven million units (including joint ventures) in 2018), with Jeep targeted to more than double its annual sales in this timeframe and Alfa Romeo projected to attain global annual sales of approximately 350 thousand units (from current annual volumes of roughly 100 thousand units). Additionally, planned investments of the Company through this time period are substantial as aggregate capital expenditures are projected by DBRS to range from 45 billion to 50 billion, with the majority of such investments being allotted in the earlier years (i.e., 2014 to 2016) of the business plan.

As a function of the above and amid ongoing headwinds across certain markets, Fiat’s earnings / cash generation over the next three years (i.e., through year-end 2016) are not anticipated by the Company to be at sufficient levels to enable a meaningful reduction in industrial indebtedness, with the likely sustained weak financial profile leading to the ratings downgrade. DBRS notes that the ratings at this point are effectively constrained by the weak financial profile of the Company, as DBRS has a more positive view of Fiat’s business profile, which is analyzed on a combined basis. The business profile could be subject to material additional improvement in the event that Fiat were to essentially meet the targets outlined in its current five-year plan, although as noted previously some of the stated objectives are considered by DBRS to be somewhat aggressive.

The Stable trend of the ratings incorporates DBRS’s assumption that Fiat’s earnings performance over the near-term is likely to remain essentially flat vis-à-vis recent levels. While the Company may continue to generate negative free cash flow, such cash burn would likely prove moderate. Furthermore, DBRS notes that Fiat’s liquidity position on a stand-alone basis remains quite sound, with total liquidity of the industrial operations as of June 30, 2014, amounting to 10.8 billion, (consisting of 8.7 billion in cash balances and 2.1 billion in available (undrawn) committed credit lines). DBRS also notes that Chrysler’s liquidity position is reasonably solid and would currently represent additional liquidity, with such being considerably bolstered upon the removal of Chrysler’s ring-fencing.

Notes:
All figures are in euros unless otherwise specified.

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

Fiat S.p.A. of Italy, the parent company for the Fiat Group, unconditionally guarantees Fiat Finance Canada Ltd. debt.

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 methodologies are Rating Companies in the Automotive Manufacturing Industry, DBRS Criteria: Financial Ratios and Accounting Treatments — Non Financial Companies, DBRS Criteria: Guarantees and Other Forms of Explicit Support and Rating Captive Finance Companies, which can be found on our website under Methodologies.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.