DBRS Morningstar Confirms Fiat Chrysler Automobiles N.V. at BBB (low), Negative; Removes Ratings from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of Fiat Chrysler Automobiles N.V. (FCA or the Company) at BBB (low). With this rating action, FCA’s ratings are removed from Under Review with Negative Implications, where they were placed on March 27, 2020, as a result of the global escalation of the Coronavirus Disease (COVID-19) pandemic. Pursuant to the moderate scenario as outlined in the DBRS Morningstar commentary titled “Global Macroeconomic Scenarios: Application to Credit Ratings” (dated April 22, 2020, and subsequently updated on June 1, 2020, and July 22, 2020), notwithstanding an anticipated softening of FCA’s credit metrics, DBRS Morningstar currently estimates that the Company’s financial risk assessment (FRA) will remain at levels commensurate with the existing ratings. The trend on the ratings is Negative, however, reflecting significant headwinds facing the automotive industry and uncertainty regarding the future progression of the coronavirus.

DBRS Morningstar notes that prior to the coronavirus pandemic, the Company’s FRA was at solid levels that provided considerable cushion in the context of the current ratings. This was a function of FCA’s improving earnings/cash flow generation in the past several years, supplemented by substantial repayments (that exceeded EUR 20 billion) of industrial indebtedness during that period. As with other automotive original equipment manufacturers (OEMs), the coronavirus pandemic materially affected the Company’s operations globally, initially in China (where the Company’s exposure is modest) in January 2020 and subsequently across Europe, Latin America, and North America (as well as several other smaller jurisdictions) in March 2020. In line with the trajectory of the pandemic, FCA’s financial results through the first half of 2020 were correspondingly weaker (compared with the similar prior-year period). This notwithstanding, the Company’s operating performance has been somewhat resilient, notably with respect to its core North American operations that managed to generate a slight profit in Q2 2020 despite a substantial drop in unit shipments of over 60% (compared with Q2 2019). Taking into account an estimated progressive recovery from very weak levels over the remainder of the year, DBRS Morningstar nonetheless expects FCA’s 2020 annual worldwide sales to decline by more than 20% compared with 2019 levels, with operating earnings also being significantly affected, though anticipated to remain at positive levels. Regarding cash flow generation, despite a suspension of ordinary dividends and deferrals of certain capital expenditures (capex), DBRS Morningstar estimates that annual free cash flow in 2020 will be negative, exacerbated by working capital cash usage (that is nonetheless estimated to be considerably alleviated in the latter half of the year amid the assumed sales recovery). In aggregate, while the coronavirus pandemic will markedly interrupt FCA’s performance momentum over the past several years, DBRS Morningstar nonetheless expects the Company’s FRA over the near term to remain within investment-grade levels. Moreover, DBRS Morningstar also notes that markedly stronger showings of the Dodge, Ram, and Jeep brands in J.D. Power’s most recent Initial Quality Study have served to moderately bolster FCA’s overall business risk assessment.

Consistent with other OEMs, the Company implemented several measures to bolster its liquidity position in response to the coronavirus pandemic. These include the aforementioned reductions in capex and ordinary dividends. Additionally, in March and April 2020, the full availability of FCA’s credit facilities (of an aggregate amount of EUR 7.7 billion) were drawn down. Also in March, the Company entered into a EUR 3.5 billion incremental bridge credit facility that was syndicated in April 2020 and ultimately taken out by an ensuing bond offering of the same amount issued on July 7. Finally, in June 2020, the Company closed a EUR 6.3 billion credit facility with Intesa Sanpaolo (80% percent of associated borrowings being guaranteed by SACE S.p.A., the Italian export credit finance agency). As a function of the above, DBRS Morningstar deems the Company’s liquidity position to be sufficient to withstand any reasonably foreseeable scenario associated with the pandemic.

Notwithstanding the substantially negative effects of the coronavirus pandemic on global automotive sales and production, DBRS Morningstar nonetheless notes that the ensuing sales recovery across major jurisdictions has thus far moderately exceeded its expectations. Industry sales in China (the world’s largest single automotive market) reverted to year-over-year growth as of April 2020 and continue to develop positively, although, as noted earlier, FCA’s presence in that market remains modest for the time being. With respect to North America (substantially the United States), which, in terms of earnings, represents by far the Company’s most important market, industry sales have also been trending favourably following the substantial drop in volumes exhibited in March. While DBRS Morningstar acknowledges that the pandemic shows no signs of abating across several states, this has yet to derail the national sales momentum. Moreover, the OEMs and the supply base have demonstrated resilience in their (substantially successful) ability to resume production, with additional widespread stoppages therefore being deemed somewhat unlikely.

Consistent with the Negative trend on the ratings and recognizing the ongoing uncertainty regarding the ultimate severity and duration of coronavirus, DBRS Morningstar notes that a further progression of the pandemic (such that it readily approximates the adverse scenario as outlined in the above-cited commentary) could result in additional downward rating pressures. Conversely, should the worst effects of coronavirus pandemic be significantly contained through the first half of 2020 and followed by a meaningful recovery in the remainder of the year, the trend on the ratings could be changed to Stable. Finally, any material developments with respect to the planned merger with Peugeot SA would likely trigger a revision of the ratings.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883/dbrs-morningstar-provides-update-on-rating-methodologies-in-light-of-measures-to-contain-coronavirus-disease-covid-19.

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:

Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019) was utilized to evaluate the ratings of Fiat Chrysler Automobiles NV. Subsequently, DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships (November 25, 2019) was applied to assess the corporate structure of the Fiat group of companies.

The last rating action took place on March 27, 2020, when DBRS Morningstar placed the ratings of Fiat Chrysler Automobiles N.V. Under Review with Negative Implications.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

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, Diversified Industries
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries and Sports Finance
Initial Rating Date: November 8, 2005

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

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-- Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019)
https://www.dbrsmorningstar.com/research/352181/rating-companies-in-the-automotive-manufacturing-and-supplier-industries
-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019)
https://www.dbrsmorningstar.com/research/353260/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships