DBRS Morningstar Places Peugeot SA and Fiat Chrysler Automobiles N.V. Under Review with Positive Implications Following Announced Planned Merger

DBRS Limited (DBRS Morningstar) placed the Issuer Rating and Senior Unsecured Debt ratings of BBB (low) on Fiat Chrysler Automobiles N.V. (FCA) and Peugeot SA (PSA) Under Review with Positive Implications. The rating action follows the announcement that both companies have agreed to work toward a full combination of their respective businesses by way of a 50/50 merger (the Merger). Additional details of the prospective Merger include a resulting 11-member board of directors with five appointees from each of FCA and PSA. The companies are currently negotiating the Merger that will be subject to customary closing conditions, including final board approvals of the binding Memorandum of Understanding and agreement on definitive documentation.

DBRS Morningstar notes that the Merger, if completed, would likely result in positive rating actions as it would create the fourth-largest automotive original equipment manufacturer globally. Moreover, the Merger is expected to ultimately result in sizable annual run-rate synergies of approximately EUR 3.7 billion, including purchasing efficiencies and the more efficient allocation of resources for large-scale investments in vehicle platforms, powertrain and technology, among others. DBRS Morningstar observes that the increased scale and resulting synergies are critical in the context of the substantial cost headwinds facing the automotive industry as a result of alternative powertrain development (i.e., electrification), autonomous driving and digital connectivity.

DBRS Morningstar also notes that, aside from scale and associated efficiencies, the Merger has other strategic merits, including gains for the combined FCA/PSA entity in product diversification and, to a lesser degree, in geographic diversification. In terms of product diversification, the Merger would result in a well-diversified brand portfolio with solid representation across several vehicle segments, including luxury, premium, mainstream passenger car, sport-utility vehicles as well as trucks and light commercial. Regarding geographic diversification, in recent years, FCA has generated more than 80% of its earnings in North America where PSA has no presence. While FCA and PSA both have significant presences in Europe, geographic diversification benefits would nonetheless ensue across Europe’s constituent markets as the combined entity would have a strong number two position in Europe. In Latin America, FCA has a favourable market position whereas PSA’s is modest. Neither company currently has a strong position in China which, despite its recent contraction, remains the world’s largest automotive market.

Based on these considerations, DBRS Morningstar observes that the Merger would likely result in a business risk assessment (BRA) for the combined entity that would be meaningfully stronger than the existing BRAs for each company on a stand-alone basis. DBRS Morningstar also notes that the current financial risk assessments (FRA) for FCA and PSA exceed levels commensurate with their existing ratings as the industrial operations of both companies currently have a net-cash position (i.e., cash levels exceed total debt). Accordingly, the combined entity’s resulting financial profile is not expected to represent an impediment to a potential rating upgrade. As such, absent any unforeseen materially negative impact on the FRA stemming from the Merger or any negative regulatory requirement, DBRS Morningstar anticipates that it would likely result in a higher rating for the combined entity than each of the company’s existing ratings alone.

DBRS Morningstar expects to resolve the Under Review with Positive Implications status on the ratings by the anticipated closing of the transaction. DBRS Morningstar’s review will consist of a detailed assessment of the combined entity’s anticipated prospects amid projected market developments and conditions. Moreover, DBRS Morningstar will undertake discussions with the combined company’s management as part of its review.

Notes:
The following disclosures apply to Fiat Chrysler Automobiles N.V.:

All figures are in euros unless otherwise noted.

The principal methodology is Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2019), 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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 took place on April 5, 2019, when DBRS Morningstar upgraded the Issuer Rating and Senior Unsecured Debt ratings of Fiat Chrysler Automobiles N.V. to BBB (low) from BB (high) with Stable trends

For further information on DBRS Morningstar 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

The following disclosures apply to Peugeot SA:

All figures are in euros unless otherwise noted.

The principal methodology is Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2019), 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 [email protected].

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have 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 took place on June 3, 2019, when DBRS Morningstar upgraded the Issuer Rating and Senior Unsecured Debt rating of Peugeot SA to BBB (low) from BB (high) with Stable trends.

Solely with respect to ESMA regulations in the European Union, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS Morningstar had no access to accounts, management and other relevant internal documents for the rated entity or a related third party.

For further information on DBRS Morningstar 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 27, 2000

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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