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 current rating continues to be supported by the Company’s stable business profile, with a diversified portfolio of businesses and a solid position in the global agricultural equipment market in particular. However, operating performance in 2015 has been weaker than expected and CNHI’s financial profile, although it remains acceptable for the current rating, does not have much cushion to absorb additional deterioration. DBRS notes that further meaningful decline in operating performance and associated key debt coverage ratios would likely lead to negative rating actions.

Much weaker performance at the Company’s agricultural equipment business (AG), CNHI’s dominant business, was the major factor depressing the overall operating profit at CNHI. Lower farm income due to softening grain prices led to a sharp drop in equipment demand. This caused operating profit at AG in the first nine months in 2015 to be well below DBRS’s expectations. The poorer overall earnings and the associated internal cash generation weakened all key debt coverage ratios. Nevertheless, lower debt levels from repayment of matured debt help support CNHI’s financial risk profile, although weaker, to remain acceptable to the current rating. The Company expects improvement in the fourth quarter, a seasonally stronger quarter, as well as ongoing benefits from structural cost reductions. The Company expects industrial revenue for 2015 in the range of $25 billion to $26 billion and operating margin of 5.6% to 6.0%, from $17.8 billion and 4.9% in the first nine months, respectively. CHNI also targets to reduce net debt to between $2.1 billion and $2.3 billion, from $3.4 billion in Sept 2015.

The Company’s stable business profile is a positive supporting the current rating. CNHI has a solid position in the global agricultural equipment sector, with strong presence in all key geographical markets and business diversity with a meaningful presence in construction equipment and commercial vehicles, expanding external sales in the powertrain business and a growing financial services business offering competitive advantage to the industrial businesses.

Conditions in the agricultural sector are expected to remain challenging, with continued strength in the U.S. dollar still a formidable headwind. Therefore, DBRS views the Company’s guidance on achieving operating margin of 5.6% to 6.0% in F2015 to be ambitious. Given the forecast for continued challenging global agriculture equipment market conditions, DBRS anticipates some decline in operating earnings and cash flows in 2016. However, DBRS expects the impact of lower operating results to be partly mitigated by CNHI’s ongoing efforts to reduce debt, with the resultant financial risk profile to stabilize near current levels. However, further declines in operating results and a lack of progress on debt reduction would cause all key debt coverage ratios to be aggressive for the current rating and would likely lead to negative 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.