DBRS Confirms Fiat Chrysler Automobiles at BB (low), Trend Stable

DBRS Limited (DBRS) has today confirmed the long-term ratings of Fiat Chrysler Automobiles N.V. (FCA or the Company) at BB (low) with Stable trends. Concurrently, pursuant to “DBRS Criteria: DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers,” the instrument rating of FCA’s Senior Unsecured Debt is also herein confirmed at BB (low), in line with the assessed recovery rating of RR4. (The BB (low) Senior Unsecured Debt rating of Fiat Chrysler Finance Canada Ltd. recognizes the unconditional guarantee of the Company.) The rating confirmations incorporate somewhat stronger recent financial results amid several ongoing initiatives of the Company to raise capital and lessen the substantial debt burden of the industrial operations, tempered by FCA’s substantial planned investments as per its existing business plan that extends through year-end 2018.

FCA’s moderately improved earnings and cash flow generation over the 12-month period ending June 30, 2015, are significantly a function of considerably firmer results in the NAFTA region in line with enduring solid conditions in its core U.S. market, bolstered further by meaningful share gains with favourable sales performance of the Jeep and Chrysler brands, as well as Ram pickup trucks. FCA’s EMEA region, which had incurred losses for several years prior, is now also marginally profitable given ongoing cost-reduction activities amid a modest recovery in the region. Also positively impacting earnings were strong margins of luxury brands Ferrari and Maserati, in addition to FCA’s increasing presence in Asia.

DBRS notes that FCA’s financial profile has also moderately benefited from the Company’s Q4 2014 issuance of mandatory convertible securities (not rated by DBRS) in the total amount of $2.875 billion (EUR 2.3 billion equivalent) in addition to the offering of 100 million common shares for total proceeds of $1.1 billion (EUR 877 million equivalent). In accordance with “DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers,” DBRS has assigned an equity treatment of 75% to the mandatory convertible securities issuance. The proceeds from the above served to substantially offset the January 2014 acquisition of the remaining 41.5% ownership interest in FCA US LLC (FCA US), formerly Chrysler Group LLC, with FCA’s financial profile being well commensurate with the assigned ratings.

However, the Company continues to face extensive investments as per FCA’s current business plan. From 2015 through 2018, planned capital expenditures are projected by DBRS to slightly exceed EUR 30 billion in line with significant growth objectives concentrated in the NAFTA and APAC regions, the globalization of the Jeep brand and the relaunch of the Alfa Romeo brand. The planned investments are rendered further burdensome given FCA’s substantial indebtedness, as the Company’s industrial operations as of June 30, 2015, had a net debt position of approximately EUR 8 billion.

In line with the above, FCA is undertaking additional measures to raise capital. These include the planned spin-off of Ferrari that is to consist of an initial public offering (IPO) of a 10% ownership interest in Ferrari by the Company, with the remaining 80% interest to be distributed to FCA shareholders (Ferrari’s Vice Chairman Piero Ferrari will continue to hold a 10% ownership stake). In addition to the IPO proceeds (which are anticipated by DBRS to likely approximate EUR 1 billion), the Company has indicated that the deconsolidation of Ferrari is expected to result in a reduction of net industrial debt of roughly EUR 0.7 billion.

Moreover, FCA is also taking measures to eventually remove any restrictions as concerns its access to FCA US’s liquidity, which historically has been somewhat limited as per the conditions of certain financings. In May 2015, the Company prepaid the $2.9 billion FCA US notes due June 2019, with the prepayment of the $3.1 billion FCA US notes due June 2021 and the refinancing or amendment of FCA US’s term loans and revolving credit facility expected by no later than June 2016 (at which point FCA’s access to FCA US’s cash is expected to become unfettered).

Notwithstanding the above-cited measures, DBRS notes that the Company still faces challenges as concerns its future operating performance as well as the funding of its existing business plan. While Europe appears to have (albeit moderately) recovered and the North American automotive market is expected to remain favourable over the medium term, DBRS notes that industry prospects in China, which was slated to represent a sizeable proportion of FCA’s future growth, appear to be meaningfully deteriorating in line with automotive sales that have contracted in recent months. Moreover, conditions in Latin America, which remains a key market for the Company, have deteriorated substantially the past couple of years and are not expected to improve anytime soon. Additionally, notwithstanding the anticipated capital proceeds and debt reduction associated with the planned spin-off of Ferrari, DBRS notes that the separation of Ferrari would adversely impact future earnings. While this may be eventually offset by the increasing presence of Maserati (whose unit volumes in 2014 grew by a substantial 137% year over year), the brand’s growth has diminished by 11% thus far through 2015 in line with weaker demand in China.

The Stable trend on the ratings incorporates DBRS’s assumption that, while FCA’s earnings and cash flow generation will likely continue to moderately improve, this is expected to be considerably offset by the Company’s sizeable planned capital expenditures, such that free cash flow generation over the near term will likely prove modest, thereby effectively precluding any material improvement in its financial profile. In contrast, however, the anticipated unfettered availability of FCA US’s significant cash balances amid the above-cited earnings performance render it quite unlikely that the ratings would be subject to negative pressure over the near term.

Notes:
All amounts are in euros unless otherwise specified.

Fiat Chrysler Automobiles N.V., unconditionally guarantees Fiat Chrysler 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.

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

The applicable methodologies are Rating Companies in the Automotive Manufacturing Industry and Global Methodology for Rating Finance Companies, which can be found on our website under Methodologies.