DBRS Confirms Fiat Chrysler Automobiles at BB (low), Trend Changed to Positive from Stable

DBRS Limited (DBRS) has today confirmed the long-term ratings of Fiat Chrysler Automobiles N.V. (FCA or the Company) at BB (low). Concurrently, pursuant to “DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers”, the instrument rating of FCA’s Senior Unsecured Debt is also confirmed at BB (low), given the assessed recovery rating of RR4. The trend on the ratings has been changed to Positive (from Stable). The trend change reflects FCA’s improved financial risk profile as a function of its spin-off of Ferrari N.V. (Ferrari) in addition to the removal of the ring-fencing of FCA US LLC (FCA US) from the rest of FCA Group. These developments, amid improving earnings performance have effectively migrated FCA’s credit metrics to levels above the currently assigned ratings.

The Company’s financial profile has materially benefitted from the Ferrari spin-off. Net proceeds of the Ferrari IPO (of 10% of the company with the remaining 80% being distributed to FCA shareholders and mandatory convertible debtholders) amounted to EUR 0.9 billion, and the Ferrari IPO and subsequent spin-off in aggregate ultimately had a positive EUR 1.5 billion impact on FCA’s net industrial indebtedness. Furthermore, FCA’s liquidity has also been considerably reinforced by the removal of the ring-fencing (achieved through prepayment / renegotiation of certain indebtedness) of FCA US. As a result, FCA now has unfettered access to FCA US’s sizeable cash balances (that as of year-end 2015 exceeded EUR 10 billion) with the Company now able to implement a unified financial policy and platform. (DBRS notes further that the ring-fencing removal also triggered the availability of FCA’s second EUR 2.5 billion tranche of its revolving credit facility, further bolstering available liquidity.)

FCA’s earnings and cash flow generation have also moderately improved over the 12-month period ending June 30, 2016, primarily due to firmer results in the NAFTA region. Profitability of the EMEA segment also increased, although margins remain at modest levels with the segment still accounting for only a minor portion of consolidated earnings. Across other regions, losses narrowed in Latin America albeit persisted amid ongoing very challenging regional industry conditions. In Asia Pacific earnings contracted in line with negative product mix (mostly occurring in Q1 2016) and weaker volumes in China (associated with the transition to the localized production of Jeep models) and Australia. Regarding FCA’s luxury segment, now wholly represented by Maserati, profitability last year was adversely impacted by weaker demand in key markets such as China and North America, with earnings through the first half of this year being undermined by product launch costs for the new Levante sport-utility vehicle and restyled Quattroporte.

Notwithstanding the above-cited progresses, the Company still faces challenges. While earnings have been improving, free cash flow generation is likely to remain limited amid substantial planned capital expenditures of the Company as per its existing business plan that extends through 2018. Moreover, while the spin-off of Ferrari benefitted FCA’s financial risk profile, DBRS notes that the Company’s business risk assessment has been somewhat negatively affected, reflecting the lost earnings power of one of the industry’s leading luxury brands that generates very strong margins while typically being highly resilient to cyclical downturns. DBRS also views with caution the Company’s realignment of its manufacturing capacity in NAFTA to deliberately further overweight its dependence on trucks and utility vehicles (that already represented 68% of FCA’s U.S. sales in 2015) at the expense of cars and multipurpose vehicles.

DBRS however recognizes the Company’s improved credit metrics and, assuming FCA’s recent operating performance remains on track, would anticipate upgrading FCA’s ratings within the first quarter of 2017. DBRS acknowledges that the Company is subject to various investigations, including that of the U.S. Securities and Exchange Commission and Department of Justice with respect to FCA US’s regional sales reporting practices. DBRS has not anticipated nor incorporated (in this rating action) any materially negative consequence to FCA as a result of such investigations, (although unexpected substantially adverse outcomes could potentially trigger a review of the ratings).

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.