DBRS Confirms CNH Industrial N.V. at BB (high), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating of CNH Industrial N.V. (CNHI or the Company) at BB (high) with a Stable trend. The confirmation reflects that CNHI has performed in line with expectations and its business and financial profile are compatible with the current rating. Near term, soft demand for agricultural equipment is expected to constrain CNHI’s earnings, which are expected to stay near current levels, and the resultant financial profile will remain little changed. The Company’s rating is expected to remain stable.

Agricultural Equipment (AG) is the dominant business, and its performance strongly influences the Company’s profitability. In 2013, rising AG contribution has helped offset weaknesses in Construction Equipment (CE) and Commercial Vehicles (CV) businesses and helped moderate CNHI’s decline in operating profit. Currently, weak grain prices have threatened farm income and removed the tailwind to the demand for agricultural equipment. Even though rising construction activities in the United States has reversed the loss-making position at CE, it is unlikely to offset the decline in AG, and DBRS expects CNHI’s operating profit in 2014 and 2015 to be comparable and marginally below 2013.

Capital expenditures have been on a rising trend and are expected to stay elevated in 2014 to support geographical expansion and investment in new products and productivity improvement projects. DBRS expects CNHI to incur a modest deficit in free cash flow in 2014, an improvement from a large deficit in the first nine months caused by a large increase in inventory. Consequently, CNHI’s financial profile (with Financial Services (FS) on an equity basis) is expected to weaken modestly compared to 2013, due to lower profits and higher debt levels. Although aggressive, CNHI’s weakened financial profile is still acceptable for the current rating, as a meaningful portion of CHNI’s borrowing is loaned to FS, which has the capacity to raise external debt on its own to replace these loans. Net of the intercompany loan, the Company’s financial metrics are well above the current rating range. Moreover, the Company’s adjusted financial profile has cushions to absorb further modest declines in operating performance and remain within the current rating range.

The Company business profile has remained relatively steady. The Powertrain business is on a steady growth trend, a positive, but its relatively modest size is not yet sufficient to alter the overall business profile. Hence, DBRS expects the current rating to be stable in the medium term. However, an expected sharp deterioration in operating results from a prolonged decline in the demand for agricultural equipment could lead to negative rating actions. Conversely, a strong recovery in operating performance as a result of improved business conditions, coupled with meaningful deleveraging actions, could lead to positive rating actions.

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.

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

The applicable methodology is Rating Companies in the Industrial Products Industry, which can be found on our web site under Methodologies.

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