DBRS Places Fiat Chrysler Automobiles Under Review with Developing Implications

DBRS Limited (DBRS) has today placed the ratings of Fiat Chrysler Automobiles N.V. (FCA or the Company), formerly rated at BB (low) with Positive trend, Under Review with Developing Implications. The rating action follows the January 12, 2017, announcement of the U.S. Environmental Protection Agency (EPA) that it had issued to FCA (as well as to subsidiary FCA US LLC (FCA US)) a notice of violation of the Clean Air Act in connection with the Company’s 2014–2016 model year light duty vehicles sold in the U.S. equipped with 3.0 litre diesel engines.

The above-cited vehicles consist of the Jeep Grand Cherokee and Ram 1500 nameplates and total approximately 104,000 units. The EPA is alleging that elements of these vehicles’ emission control software, referred to as Auxiliary Emission Control Devices (AECDs), were not disclosed by the Company, thereby violating certain provisions of the Clean Air Act. The EPA further indicated that it is investigating as to whether the AECDs in question constitute “defeat devices” (that are deemed to unduly reduce the effectiveness of emissions control systems under conditions that may reasonably be expected under normal vehicle operation and use). The EPA added that the Company faces fines up to a maximum potential amount of approximately USD 44,500 per vehicle, which theoretically could total up to USD 4.6 billion (given the population of affected vehicles in the United States).

DBRS notes that FCA disputes the allegations of the EPA; the Company added further that it intends to present its case to the EPA and work with the incoming administration to resolve the matter.

While it remains premature to reasonably estimate any associated cost total possibly stemming from the EPA’s recent allegations (the EPA Allegations), DBRS observes that the Company’s ability to absorb any remotely foreseeable costs appears quite considerable, as FCA’s liquidity (bolstered by the removal last year of the former ring-fencing of FCA US) is sizeable, with available liquidity as of September 30, 2016, amounting to EUR 23.2 billion. This notwithstanding, DBRS notes further, however, that any significant costs could considerably undermine the Company’s current business plan (which was already deemed somewhat ambitious by DBRS given aggressive underlying sales growth assumptions, particularly with respect to the Jeep brand and the Chinese market). In particular, FCA’s net industrial cash target, projected to be in the range between EUR 4.0 billion to EUR 5.0 billion by year-end 2018, would appear to be at risk in the event that a material payout would result from subsequent developments stemming from the EPA Allegations.

DBRS’s review will assess ongoing developments, including any additional actions taken by regulatory authorities in the U.S, including the EPA but also notably the Department of Justice, and potentially across other regions. DBRS will also monitor FCA’s vehicle sales in the upcoming months to observe as to whether the EPA Allegations will adversely impact the Company’s volumes going forward, thereby undermining future profitability and cash flow.

Notes:
All figures are in euros unless otherwise noted.

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

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