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26 Jun 2002
MOODY'S LOWERS FIAT'S LONG-TERM RATING TO Baa3 AND SHORT-TERM RATING TO P-3; CASE RATING CONFIRMED AT Ba2; OUTLOOK FOR THE COMPANIES IS NEGATIVE.
Approximately $15 Billion of Debt Securities Affected.
New York, June 26, 2002 -- Moody's Investors Service lowered its ratings of debt guaranteed by Fiat
S.p.A - senior unsecured ratings were reduced to
Baa3 from Baa2 and the rating for commercial paper was lowered to Prime-3
from Prime-2. In a related action Moody's confirmed the
Ba2 rating of Case Corporation and Case Credit Corporation. The
outlook for the Fiat and Case ratings is negative.
Fiat Rating Rationale:
The downgrade of the Fiat ratings reflects Moody's expectation that the
operating performance of Fiat's automotive business will remain under
considerable pressure through 2003. Moreover, Fiat's 86%-owned
farm and construction equipment unit, CNH NV, continues to
face a severe cyclical downturn, and the company's truck operation,
Iveco, will have to contend with softer demand in the European market
into 2003. As a result, debt protection measures for Fiat's
industrial operations will remain weak. During 2002 the rate of
cash-burn (after working capital, capex and dividends) could
exceed 1 billion. In the face of this challenging environment,
Fiat is implementing a significant debt-reduction program that
Moody's believes will provide a critical enhancement to the company's
near-term financial flexibility. The major components of
this plan include: 1) the establishment of a 3 billion bank
loan that will mandatorially convert into equity in three years;
2) the sale of 51% of Fiat's automotive consumer credit operations
and the creation of a joint venture to provide retail auto financing -
the resulting reduction in Fiat debt will exceed 8 billion;
3) the monetization of Fiat's investment in Italenergia for net proceeds
of about 1.7 billion; 4) an IPO of 35% of Fiat's
ownership in Ferrari for approximately 800 million; and,
5) the ongoing effort to dispose of various non-core industrial
and financial assets that could yield total proceeds in excess of 1.6
billion through 2003. These initiatives could result in a significant
reduction in Fiat's industrial and financial services gross debt that
currently stands at about 35 billion. The Italenergia transaction
has been completed, and Fiat has received commitments from important
relationship banks to proceed with the mandatory convertible and the financial
services joint venture transaction. Fiat's debt reduction initiatives,
in combination with its 5.5 billion in cash and securities,
4.5 billion in committed borrowing facilities, and
2.0 billion market value for its 5.8% holding
of GM common shares, should afford the company adequate financial
flexibility through early 2004. At that point, Fiat will
have the option to put the remaining 80% of Fiat Auto to GM.
Moody's believes that the exercise of this put option would be a critical
feature of Fiat's longer-term operating and financial profile,
and would provide significant support for sustaining the Baa3 rating.
Putting its automotive operations to GM would eliminate the most significant
drag on Fiat's long-term operating performance, cash generation
and return measures. It could also result in a material inflow
of additional cash, depending on the fair market value of Fiat Auto
at the time of an exercise.
The Baa3 rating anticipates that Fiat's debt-reduction initiatives
will be completed in a timely manner and that they will be structured
in a fashion that is beneficial to creditors. Moody's notes that
the structural, legal, and covenant framework established
for the mandatory convertible, the automotive finance joint venture,
and the Italenergia transactions will be important factors in determining
the ultimate degree of benefit that these three initiatives afford to
Fiat's financial flexibility. In addition to the benefits associated
with the debt reduction program, the rating also anticipates that
Fiat will continue to improve the operating efficiencies and return measures
of CNH, and preserve the strong competitive positions of its other
operating businesses. These businesses include Iveco (medium-duty
trucks), Fiat Avio (aerospace componentry), Toro (insurance),
and the growing Business Solutions operations
Moody's believes that the future exercise by Fiat of the GM put option
would enhance the company's credit quality and help solidify its position
within the current rating level. Consequently, the pro forma
performance of Fiat's industrial operations excluding Fiat Auto is an
important consideration in Moody's assessment of the company's credit
quality. This pro forma assessment also takes into consideration
the sizable near-term debt repayments that will likely result from
the Fiat debt reduction plan. Although this pro forma performance
(which excludes Fiat Auto) is much stronger than that of the consolidated
industrial operations (which includes Fiat Auto), we believe that
the resulting debt protection measures would be only marginally supportive
of the Baa3 rating into 2003. However, if Fiat receives a
material payment upon an exercise of the GM put, and if it is able
to achieve the planned level of improvement in the operating performance
of its remaining businesses, the company's credit profile could
strengthen in 2004. The ultimate degree of improvement would be
driven by the then determined value of Fiat Auto, and by Fiat's
use of the proceeds received. As explained below, the company
could devote a major portion of any proceeds from the GM put to pre-pay
the 3 billion convertible loan.
Fiat Rating Outlook:
Fiat's negative outlook recognizes Moody's expectation that the company's
operating performance and debt-protection measures will remain
very weak for the current rating level through 2003, despite the
significant benefits that will flow from the debt reduction plan,
and any pro forma adjustment for an exercise of the GM put. In
order to avoid pressure on the rating and limit the risk of a further
downgrade, the company must make steady progress in completing the
key components of its debt-reduction program, and maintain
the recent pace of improvement in the operating performance of CNH.
Moody's recognizes that in 2004, Fiat could chose to either exercise
the GM put or pursue other alternatives for its car business. If
Fiat does not exercise the put, it will be critical for the company
to: 1) achieved a significant and sustainable improvement in Fiat
Auto's operating performance; 2) materially exceed expectations for
implementing all of the components of its debt reduction plan; and
3) successfully pursued an alternative strategy for the merger or sale
of its car operations to another manufacturer.
CNH Rating Rationale:
The confirmation of the CNH rating reflects the financial and operational
progress the company is making in the face of its large debt burden and
the cyclical downturns in both the agricultural and construction equipment
markets. Financially, CNH's credit quality will benefit from
the decision by Fiat to convert approximately $1.3 billion
in inter-company debt into equity, and the completion of
a $200 million equity offering. Operationally, CNH
is starting to harvest the benefits from the combination of Case and New
Holland, and the aggressive cost cutting initiatives that have been
undertaken. The company's performance during 2003 should also benefit
from the passage of the 2002 U.S. Farm Bill.
CNH Rating Outlook:
CNH's negative outlook recognizes the fact that the company's rating and
credit quality are tied to that of Fiat. CNH's rating continues
to enjoy an important degree of benefit and lift as a result of its strategic
importance to Fiat. Absent this relationship, CNH's rating
would be considerably lower than the current level, and pressure
on the Fiat rating would result in pressure on the CNH rating.
In addition, CNH's industrial debt burden remains high, and
the company must continue to successfully implement the Case/New Holland
integration and the ongoing cost reduction initiatives.
Ratings lowered are:
Fiat Finance & Trade Ltd.: senior unsecured medium-term
notes and bonds to Baa3 from Baa2, and short-term debt to
Prime-3 from Prime-2 based on a Fiat guarantee.
Fiat Finance Canada Ltd.: senior unsecured medium-term
notes and bonds to Baa3 from Baa2, and short-term debt to
Prime-3 from Prime-2 based on a Fiat guarantee..
Fiat Finance Luxembourg S.A.: senior unsecured convertible
notes to Baa3 from Baa2 based on a Fiat guarantee.
Fiat Finance North America Inc.: senior unsecured medium-term
notes and bonds to Baa3 from Baa2, and short-term debt to
Prime-3 from Prime-2 based on a Fiat guarantee.
Fiat France S.A.: short-term debt to Prime-3
from Prime-2 for short-term debt.
New Holland Credit Company LLC: short-term debt to Prime-3
from Prime-2 based on a Fiat guarantee.
Rating confirmed are:
Case Corporation: senior unsecured notes at Ba2.
Case Credit Corporation: unsecured notes and medium-term
note programs at Ba2.
Fiat Debt Reduction Plan:
Fiat has received commitments from a group of commercial banks to extend
a 3 billion loan that will mandatorialy convert into common equity
in three years. We expect that this security will incorporate a
number of features that are constructive for the company's financial flexibility.
These features include the following: 1) in the event of a bankruptcy,
the bank lenders will have the claim of equity holders rather than creditors;
and 2) Fiat will have the option to capitalize up to 50% of the
required interest expense and satisfy that claim with the issuance of
common equity. A critical feature of the contemplated convertible
is Fiat's option, under certain circumstances, to pre-pay
the obligation with cash prior to conversion. The Baa3 rating,
as well as Moody's conclusion that the convertible loan affords a material
benefit to the company's capital structure, incorporates an assumption
that Fiat would exercise such an option in a financially prudent manner
that does not materially compromise the degrees of protection afforded
to debt-holders. The agency believes that this could occur
only if Fiat is able to significantly reduce debt, expand its equity
base, and improve the operating performance of its non-automotive
businesses prior to pre paying the loan. Moody's also believes
that Fiat's exercise of the GM put, or an alternative sale or merger
solution for its car business, would be a critical element in providing
the company with sufficient financial flexibility to contemplate any cash
prepayment of the 3 billion convertible.
Moody's notes that the convertible loan's terms and structure afford an
important degree of benefit to Fiat's liquidity and credit quality.
However, only Fiat and the banks extending the loan are party to
the agreement; other creditors are not. Consequently,
a possibility exists that the terms of the loan (conversion features,
maturity, interest rate etc.) could be modified by mutual
agreement between Fiat and the banks. Moody's notes that it does
not believe there is any significant probability that the terms of the
convertible will be modified in a manner that is detrimental to Fiat's
overall credit quality. Nevertheless, the possibility of
an amendment is one of the risk factors considered in our overall assessment
of Fiat's financial flexibility and rating.
Fidis, Fiat's financial services operation, provides retail
and wholesale financing for Fiat's automotive and truck operations.
Its portfolio of receivables is funded by a significant portion of Fiat's
35 billion of gross debt. Fiat has received commitments from
banks to participate in the establishment of a joint venture that will
provide funding for the retail financing requirements of Fiat's automotive
operations. Moody's believes that this arrangement will enhance
Fiat's financial flexibility and that important features such as the following
will be reflected in the transaction when it is finalized: 1) Fiat
will sell 51% of the retail finance business to the banks -
the proceeds will be available to reduce Fiat's industrial debt;
2) the banks will provide all of the debt funding necessary to support
the joint venture's portfolio - this will enable Fiat to repay
approximately 8 billion in debt taken on to fund its financial services
operations, and will relieve it of any future funding obligation
for this business; 3) the credit scoring system and underwriting
practices that have been in place historically will be maintained -
this should insure adequate availability of financing for Fiat's retail
customers; and, 4) there will be no recourse to Fiat for losses
on the joint venture's portfolio, other than its remaining equity
Fiat has reached an agreement to sell a 14% stake in Italenergia
to three Italian banks for 576 million; this will leave it
with a 24.6% interest in Italenergia. Fiat has the
right to put this interest to EDF in March 2005 for a minimum of 1.1
billion. A consortium of banks lead by Citigroup has agreed to
lend Fiat 1.1 billion. Importantly, Fiat can
satisfy the loan, at its option, through a cash payment,
or by allowing the banks to put the remaining Italenergia shares to EDF.
The bank group will bear most of the risk of EDF's ability to performance
under the put agreement.
Fiat S.p.A., headquartered in Turin,
is one of the leading industrial groups in Italy and the third largest
European-based automobile manufacturer. The company is also
a leading European-based manufacturer of commercial vehicles and
one of the leading producers of agricultural equipment in the world.
CNH Global N.V., headquartered in Lake Forest,
Ill., was formed from the merger between Case Corporation
and New Holland N.V. and is a leading manufacturer of agricultural
and construction equipment. It is an 86%-owned subsidiary
of Fiat. CNH guarantees the rated debt of Case Corporation.
Case Credit benefits from a support agreement from Case Corporation.
Michael J. Mulvaney
Moody's Investors Service
J. Bruce Clark
Senior Vice President
Moody's Investors Service
No Related Data.
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