DBRS Upgrades Fiat Chrysler Automobiles N.V. to BBB (low), Stable Trends

DBRS Limited (DBRS) upgraded the Issuer Rating and Senior Unsecured Debt rating of Fiat Chrysler Automobiles N.V. (FCA or the Company) to BBB (low) from BB (high). All trends are Stable. The upgrade reflects FCA’s ongoing solid earnings/cash flow generation and sizable debt reduction, which have strengthened its financial risk assessment (FRA) to levels above the previously assigned ratings. Moreover, in DBRS’s press release on FCA dated September 28, 2018, DBRS indicated that the Company’s ratings would likely be subject to additional positive rating actions pending a satisfactory resolution of FCA’s emissions dispute with the United States Environmental Protection Agency and the United States Department of Justice regarding the Company’s 2014-2016 model year light-duty vehicles equipped with 3.0-litre diesel engines and sold in the United States. DBRS further notes that the associated settlement cost of approximately USD 800 million (EUR 720 million equivalent) is well absorbed by FCA’s liquidity profile. As a result of the Company’s Issuer Rating now being investment grade, there is no recovery analysis performed with respect to FCA’s Senior Unsecured Debt, with the associated recovery rating being withdrawn.

The Company’s earnings momentum has continued, with FCA’s earnings before interest and taxes (EBIT; adjusted for unusual items) attaining a record level of EUR 7.3 billion. The Company’s profitability remains substantially represented by its core NAFTA segment, which generated an EBIT of EUR 6.2 billion, representing a margin of 8.6%. The solid NAFTA results, bolstered by meaningful improvement in the Latin American region, more than offset year-over-year declines in FCA’s other regional segments as well as the considerably weaker earnings of Maserati. The ongoing earnings and associated cash flow generation have enabled sizeable debt repayments in recent years, with FCA’s net indebtedness of the industrial operations improving from a net debt position of EUR 4.6 billion as of year-end (YE) 2016 to a net cash position of EUR 1.9 billion as of YE2018. In line with its improved financial profile, the Company plans to commence ordinary dividends in 2019. Moreover, FCA’s sale of its automotive components business Magneti Marelli S.p.A. (for details please refer to DBRS’s press release titled “DBRS Comments on Fiat Chrysler Automobiles N.V.’s Announced Sale of Components Business Magneti Marelli S.p.A.” dated October 26, 2018) will facilitate the payment of an extraordinary dividend of EUR 2 billion upon closing (currently expected in Q2 2019). These shareholder-friendly activities (both of which remain subject to the approval of the Board of Directors and shareholders) notwithstanding, FCA’s credit metrics are well within investment-grade levels.

Despite the above-cited progress, the Company faces headwinds. These include improving the operating performance of its Asia-Pacific (APAC) and Europe, the Middle East and Africa (EMEA) regional segments as well as that of Maserati (that, as the case with APAC, was negatively affected by significantly weaker market conditions in China, notably in H2 2018). Additionally, consistent with the automotive industry, FCA faces cost challenges in the form of, among others, commodity cost pressures, product development costs amid tightening emissions controls and increasing technological requirements as well as new mobility initiatives. However, the Company is targeting to considerably offset these through higher platform consolidation, ongoing scale/purchasing efficiencies and additional manufacturing efficiencies; FCA is also looking at further partnerships with other original equipment manufacturers to mitigate such cost pressures. DBRS also notes that global automotive conditions remain reasonable, regional variances notwithstanding, with aggregate industry volumes in 2019 estimated to remain roughly flat year over year, with moderate growth expected to persist over the near to medium term.

DBRS expects the ratings to remain constant over the near term. While a rapid and material industry downturn could result in negative rating implications, DBRS considers such a scenario rather unlikely, noting that FCA’s FRA effectively provides some cushion against unexpected challenges at the current rating level. Conversely, further positive rating actions are rather unlikely in the context of the current cost headwinds facing the industry, with the Company’s existing business risk assessment also somewhat limiting subsequent potential upgrades.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2018), which can be found on dbrs.com under Methodologies & Criteria.

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 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this transaction took place on September 28, 2018.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Robert Streda, Senior Vice President, Autos
Rating Committee Chair: Charles Halam-Andres, Managing Director, Industrials & Natural Resources
Initial Rating Date: November 8, 2005

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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