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Rating Action:

MOODY'S DOWNGRADES FIAT TO Ba1/NOT-PRIME FROM Baa3/PRIME-3; NEGATIVE OUTLOOK

23 Dec 2002
MOODY'S DOWNGRADES FIAT TO Ba1/NOT-PRIME FROM Baa3/PRIME-3; NEGATIVE OUTLOOK

Approximately $15 Billion of Debt Securities Affected.

Frankfurt, December 23, 2002 -- Moody's Investors Service today downgraded Fiat's senior unsecured debt ratings to Ba1 from Baa3 and its short-term debt rating to Not-Prime from Prime-3. The outlook for the ratings is negative. These downgrades conclude a rating review initiated by Moody's on 8 November 2002.

The downgrades not only reflect Fiat's weak operating performance, especially at Fiat Auto, and its high debt levels, but also Moody's current expectation that Fiat's business and financial profile -- even after exercising Fiat's option to dispose of the remaining share of 80% in Fiat Auto to General Motors (GM) -- will most likely not be commensurate with an investment-grade rating.

On the positive side, Moody's rating action also recognises Fiat's management commitment to implement its strategic plan as well as all the measures already taken to address Fiat Auto's operational weaknesses. Moody's rating action is based on the assumption that the company will exit the automotive business of Fiat Auto by early 2004. The rating action also factors Fiat's intention to dispose of a major part of its financial services business (Fidis), the recently announced sale of its stake in GM as well as other disposals of assets in order to improve its overall financial profile. In Moody's view, a timely and successful implementation of these initiatives will be key to stabilising Fiat's rating in the Ba range.

Moody's negative rating outlook reflects the execution risk associated with the strategic repositioning of Fiat Auto, the weak trading environment for Fiat Auto, as well as the targeted cash flow improvements for Fiat's remaining businesses over the next 12 to 18 months.

Ratings downgraded are:

- Fiat Finance & Trade Ltd.: senior unsecured medium-term notes and bonds to Ba1 from Baa3 and short-term debt to Not Prime from Prime-3 based on a Fiat guarantee.

- Fiat Finance Canada Ltd.: senior unsecured medium-term notes and bonds to Ba1 from Baa3 and short-term debt to Not Prime from Prime-3 based on a Fiat guarantee.

- Fiat Finance Luxembourg S.A.: senior unsecured convertible notes to Ba1 from Baa3 based on a Fiat guarantee.

- Fiat Finance North America Inc.: senior unsecured medium-term notes and bonds to Ba1 from Baa3 and short-term debt to Not Prime from Prime-3 based on a Fiat guarantee.

- Fiat France S.A.: short-term debt to Not Prime from Prime-3

- New Holland Credit Company LLC: short-term debt to Not Prime to Prime-3 based on a Fiat guarantee.

Moody's expects CNH and Iveco to form the core of Fiat's operations upon completion of the current disposal plan. In view of the continued weakness in Fiat Auto's performance, the expansion of the asset disposal programme may also affect the remaining portfolio of businesses, potentially including further valuable and possibly non-strategic assets.

The largest unit, CNH, will generate at least one third of Fiat's total sales. However, CNH is currently facing severe operating financial challenges caused by the prolonged downturn and intensely competitive operating environment, especially in the North American farm equipment and construction equipment market. Moody's is also continuing its review for possible downgrade of Case Corp and Case Credit (senior debt at Ba2), which are wholly owned and guaranteed by CNH.

Moody's notes that the credit quality of CNH, an 85%-owned subsidiary of Fiat, is tied to that of Fiat, and the company's ratings have enjoyed an important degree of lift as a result of its strategic importance to Fiat. Fiat also has a significant financial stake in CNH: it currently extends approximately US$3 billion in loans to CNH, it recently converted US$1.3 billion of debt to equity, it guarantees any CNH borrowings under a US$2.5 billion credit facility, and its equity investment in CNH amounts to approximately US$2.8 billion. In the absence of such a relationship, CNH's rating would be considerably lower than the current level.

Moody's review of CNH will focus on: (1) Fiat's ability to restructure its automotive operations and stem the significant cash drain created by this unit; (2) CNH's ability to continue reducing its cost structure and to weather the continuing downturn in the North American construction equipment market; and (3) the ongoing strategic relationship between CNH and Fiat, and the degree to which CNH's credit quality might continue to benefit from this relationship. With CNH's increasingly important role within the remaining Fiat businesses, it will be very important to Fiat's Ba1 rating for CNH to articulate and implement a convincing operating plan that can improve operating and financial performance.

The Iveco truck business, which accounts for about EUR8 billion of sales, has a very competitive position within the European market and generates strong cash flow and returns on capital. Moody's expects that this business will become one of the more important sources of earnings and financial flexibility going forward. The rating agency also notes that expansion through acquisitions is a strategy that might be pursued to grow these operations.

Moody's also notes that the confirmed but not yet signed sale of 51% of Fidis' European operations to Italian banks is an important element in achieving the company's gross debt reduction target. The de-consolidation of Fidis would reduce gross debt by more than EUR6 billion.

Fiat S.p.A., headquartered in Turin, is one of the leading industrial groups in Italy and the third largest European-based automobile manufacturer with revenues of EUR40.7 billion generated in the first nine months 2002. The company is also a leading European-based manufacturer of commercial vehicles and one of the leading producers of agricultural equipment in the world.

Frankfurt
Dr. Juergen Berblinger
Managing Director
European Corporates
Moody's Deutschland GmbH
+49 69 707 30 700

Frankfurt
Falk Frey
Vice President - Senior Analyst
Eurpean Corporates
Moody's Deutschland GmbH
+49 69 707 30 700

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