DBRS Maintains Fiat Chrysler Automobiles N.V. Under Review with Developing Implications

DBRS Limited (DBRS) maintained the ratings of Fiat Chrysler Automobiles N.V. (FCA or the Company) Under Review with Developing Implications. (Concurrently, DBRS discontinued the Senior Unsecured Debt rating of Fiat Chrysler Finance Canada Ltd. at the request of the Company as this entity is no longer an issuer under FCA’s Euro Medium Term Note Programme.) DBRS notes that the Company’s ratings were initially placed Under Review with Developing Implications on January 16, 2017, following the announcement by the United States Environmental Protection Agency (EPA) that it issued to FCA (as well as to the subsidiary FCA US LLC (FCA U.S.)) a notice of violation of the Clean Air Act. This is in connection with the Company’s 2014-2016 model-year light duty vehicles sold in the United States, equipped with 3.0 litre-diesel engines (collectively referred to herein as the U.S. Diesel Issue). Prior to assigning the Under Review Developing Implications status, FCA’s long-term debt ratings were BB (low) with a Positive trend by DBRS. The U.S. Diesel Issue also effectively caused the production and sale of the (new) 2017 model-year FCA vehicles, equipped with the same engine, to be suspended. The maintenance of the Under Review with Developing Implications status of the Company’s ratings reflects that, notwithstanding certain subsequent positive developments, no satisfactory resolution of the U.S. Diesel Issue occurred.

Following the January 2017 announcement by the EPA, the United States Department of Justice filed a civil lawsuit against FCA in May 2017. However, FCA, in July 2017, successfully obtained emissions certification regarding the 2017 model-year vehicles, enabling their production and sale. Significantly, the required 2017 updates consisted primarily of modified emissions software calibrations, with no required hardware changes that would considerably prove to be more costly to implement. The Company intends to apply a similar modified software to the affected 2014-2016 model-year vehicles. However, FCA has yet to receive approval that such modifications will resolve the issues related to the older vehicles.

Prior to assigning the Under Review with Developing Implications status, FCA’s long-term debt ratings were BB (low) with a Positive trend. (The rating significantly reflects the Company’s improved financial risk assessment (FRA) as a result of higher earnings, the 2016 spin-off of the Ferrari N.V. and the removal of the ring-fencing of FCA U.S. from the rest of the FCA Group). Subsequently, DBRS further observes that, through the first three quarters of 2017, the Company’s performance continued to improve. FCA’s adjusted operating profit (as calculated by DBRS) through the nine-month period ended September 30, 2017, improved to EUR 5.0 billion from EUR 4.1 billion of the similar prior-year period. In its core North American Free Trade Agreement (NAFTA) market, positive performance persisted with this segment’s adjusted EBIT margin (as reported by FCA) being at a solid level of 7.9% as lower volumes (partly reflecting the Company’s progressive exit from the car and vehicle segments) have been effectively offset by firmer product mix, in addition to lower purchasing and warranty costs. While FCA’s earnings remain considerably dependent on NAFTA (which accounted for 75% of total adjusted EBIT in the nine-month period ended September 30, 2017), the Company’s higher profitability this year also incorporates incremental improvements across its other geographic segments, notably in Europe, Middle East and Africa (EMEA) and in Asia and Pacific countries (APAC). In EMEA, improved profitability incorporates higher volumes and firmer product mix (in line with the new model launches amid the improving regional industry conditions) were bolstered by industrial cost reductions. In APAC, higher earnings significantly reflect the increased volumes of locally produced vehicles of the Jeep brand, which remains very well positioned to benefit from the ongoing shift in the consumer sentiment (initially evident in North America albeit now effectively global) toward the larger utility vehicle segments and away from the car segments. Finally, FCA is progressively growing the scale and associated earnings of its premium Maserati brand as increasing volumes reflect the ongoing launch of the Levante SUV model, with Maserati’s EBIT margin being commensurate with that of other premium automotive brands with a strong level at 13.1%.

In addition to its improving performance, FCA’s balance sheet also strengthened, as evidenced in part by the progressively lower debt levels, with notable debt reductions in 2017, including the repayment (at maturity) of three note issuances with the combined amount of EUR 2.2 billion and the prepayment of FCA U.S.’s tranche B term loan (maturing May 24, 2017) of $1.8 billion. DBRS notes that such debt reductions have been largely made through a commensurate reduction in the Company’s cash balances. As such, FCA’s net industrial indebtedness as at September 30, 2017, was EUR 4.4 billion, which represents only a slight improvement from the 2016 year-end level of EUR 4.6 billion.

However, recognizing the Company’s sound earnings performance and materially lower gross debt levels, DBRS notes that FCA’s FRA improved to levels that meaningfully exceed those commensurate with the assigned ratings. Accordingly, as long as the U.S. Diesel Issue is satisfactorily resolved without the imposition of substantial punitive penalties against the Company, DBRS estimates that a ratings upgrade would likely occur that could potentially exceed a single rating notch.

Notes:
All figures are in euros 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 under Related Documents or by contacting us at info@dbrs.com.

The principal methodology is Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2017), which can be found on dbrs.com under Methodologies.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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