DBRS Upgrades Fiat Chrysler Automobiles N.V. to BB (high), Stable Trend

DBRS Limited (DBRS) upgraded the Issuer Rating and Senior Unsecured Debt rating on Fiat Chrysler Automobiles N.V. (FCA or the Company) to BB (high) from BB (low). DBRS also revised the recovery rating on the Company’s Senior Unsecured Debt to RR3 from RR4. All trends are Stable. The upgrade is based, in large part, on FCA’s strong earnings/cash flow generation and sizable debt reduction, which have strengthened its financial risk assessment (FRA) to levels meaningfully above the previously assigned ratings. This rating action also resolves the Under Review with Developing Implications status, initially assigned on January 16, 2017, and subsequently maintained on January 16, 2018.

The ratings were initially placed Under Review with Developing Implications following the U.S. Environmental Protection Agency’s announcement that it had issued a notice of violation of the Clean Air Act to FCA in connection with the Company’s 2014-2016 model year light-duty vehicles sold in the United States and equipped with 3.0-litre diesel engines (the Diesel Issue). Moreover, in May 2017, the U.S. Department of Justice filed a civil lawsuit against FCA in connection with the Diesel Issue. DBRS acknowledges that these actions have yet to be settled, which could ultimately entail the imposition of consequential fines and/or penalties, among other matters. Moreover, it remains uncertain when or under what terms the Diesel Issue will be resolved; however, DBRS recognizes that the Company’s credit metrics and, notably, its balance sheet have improved substantially since the onset of the Diesel Issue. This is demonstrated by sizable debt repayments, under which consolidated industrial indebtedness decreased to EUR 14.5 billion as of June 30, 2018, from EUR 22.5 billion as of YE2016. Additionally, FCA’s liquidity remains strong, exceeding EUR 21 billion as of June 30, 2018. As such, DBRS notes that the Company’s credit metrics have enough cushion to absorb any foreseeable penalty stemming from the Diesel Issue and remain in line with the upgraded ratings, which enables DBRS to resolve the Under Review status in advance of the Diesel Issue’s conclusion.

Furthermore, the Company’s earnings continue to trend positively, despite slight softening in Q2 2018 caused by weaker demand in China, in line with import-duty reductions effective July 2018 which postponed vehicle purchases. Performance remained solid in the core NAFTA region where the operating margin was 8% in Q2 2018. Going forward, earnings are anticipated to benefit further from higher forecasted global vehicle demand amid a firmer sales mix (reflecting additional growth in Jeep, Ram, Maserati and Alfa Romeo). Cost headwinds are also estimated to be partly offset by increasing platform consolidation and related scale/purchasing efficiencies as well as through additional manufacturing efficiencies.

While FCA faces headwinds including commodity cost pressures and tightening emissions controls, among others, its materially stronger FRA provides cushion against unexpected challenges even at the newly upgraded ratings level, thereby making a negative rating action unlikely. Additionally, a resolution of the Diesel Issue on terms DBRS considers reasonable and/or continued strengthening credit metrics would likely result in additional positive rating actions.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2017) and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (February 2018), which can be found on dbrs.com under Methodologies.

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.

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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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