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Rating Action:

Moody's changes Fiat Chrysler's outlook to positive; Ba2 rating affirmed

24 Sep 2018

Frankfurt am Main, September 24, 2018 -- Moody's Investors Service, ("Moody's") has today affirmed Fiat Chrysler Automobiles N.V.'s (FCA) Ba2 corporate family rating (CFR), the Ba2-PD probability of default rating (PDR) and at the same time changed the outlook on all ratings to positive from stable. Concurrently, Moody's has also affirmed the Ba3 rating of FCA's senior unsecured notes and the Baa2 rating of the senior secured term loan B issued by FCA US LLC, a subsidiary of FCA.

"FCA's outlook change to positive reflects the continued improvements in its credit metrics since our last upgrade in March this year," said Falk Frey, a Senior Vice President and lead analyst for FCA. "In case these metrics can be sustained even in periods of weaker demand and rising headwinds from higher raw material prices, rising interest rates and tariff changes this could result in an upgrade of FCA's ratings within the next 12-18," Frey added.

A full list of affected entities and ratings can be found at the end of this press release.

RATINGS RATIONALE

In the first half of 2018 FCA's worldwide combined shipments (including shipments from unconsolidated joint ventures) increased by 5.7% to 2.5 million vehicles from 2.4 million. Growth has mainly been driven from shipments in NAFTA (+11.6%) and LATAM (+21.0%), while combined shipments in APAC have decreased (-25.3%) mainly due to the anticipated import duty reduction in China effective July 2018 (which caused delays in both retail and wholesale demand for a large part of the second quarter), and remained relatively flat in EMEA (+0.8%). Overall this resulted in net revenues of EUR56 billion (+1%) compared to H1 2017. Although the reported adjusted EBIT of EUR3.3 billion declined by 4% compared to the first six months in the previous year, FCA reported a positive industrial free cash flow in the first half 2018 of EUR2.5 billion (compared to a slightly negative industrial free cash flow in H1 2017) which resulted in a reported net industrial cash position of EUR0.5 billion for the first time.

These reported numbers resulted in an EBITA margin improvement to 5.9% (as adjusted by Moody's) for the LTM June 30, 2018 period (5.5% fiscal year 2017), free cash flow generation (as adjusted by Moody's) of EUR3.7 billion (2017: EUR1.1 billion), a reduction in gross debt to EUR22.6 billion (as adjusted by Moody's, EUR24.4 billion in 2017 and a further reduced leverage (Moody's adjusted debt/EBITDA) of 2.1x compared with 2.4x in 2017.

For 2018 Moody's anticipates FCA's operating performance and cash flow generation to continue to improve driven by successful new product launches in higher margin SUV and pick-up segments like the new Jeep Cherokee and all-new Jeep Wrangler as well as the all-new Ram 1500 pickup, despite the slight decline in US light vehicles demand that Moody's anticipates in 2018 (-2%) as well as the continued ramp-up of the all-new Jeep Compass following completion of its worldwide roll-out in 2017.

Moody's notes that FCA's intention to operate a captive finance subsidiary fully owned in the US would be strategically positive for FCA and put FCA in a comparable position with its major competitors in North America. Concerning funding and cash needs to establish such an operation either through acquisition of an established captive finance company or its assets or by starting with a greenfield operation, we assume an amount of no more than EUR3.5 billion over the next 3 years to be spent by FCA. This includes and assumes conservative capitalization of the entity relative the its asset risks.

FCA's rating is constrained by a significant dependency on operating performance from its business in the US, with a strong reliance on performance of the Jeep and Ram models. Given the strong market dynamics there, FCA's numbers are reflective of a cyclical industry that has reached a peak, even though we do not expect a severe decline for the current year. However, a weaker market environment in the US could have adverse effects on FCA's performance and, hence, leverage.

In addition, FCA together with all other automotive OEMs is exposed to the transition risks of the industry towards alternative fuel vehicles, and autonomous driving technologies, which will weigh negatively on future cash flow generation.

FCA is subject to emissions investigations in Europe and most notably in the US. In January 2017, the U.S. Environmental Protection Agency ("EPA") accused FCA of violating the US Clean Air Act, alleging that FCA US LLC (FCA US) failed to disclose certain emissions control strategies. While discussions on possible penalties seem premature, the US Clean Air Act provides for theoretical fines of up to USD4.6 billion (does not include possible fines imposed by other authorities or civil damages). Moody's believes that a mid-single digit billion Euro amount of one-time expenses could be compensated within the Ba2 rating.

LIQUIDITY

As of 30 June 2018, FCA's liquidity profile is considered good, underpinned by EUR13.3 billion in reported cash and marketable securities for the industrial activities, as well as access to undrawn EUR7.6 billion committed revolving credit facilities (RCFs). The main Group syndicated RCF was extended and upsized by EUR1.25 billion in March 2017 and its maturities were further extended in March 2018, with EUR3.1 billion maturing in April 2021 (with two 1-year extension options available) and EUR3.1 billion in March 2023. These funding sources should cover FCA's anticipated cash requirements over the next 12 months, which comprise principally capex, debt maturities, and cash for day-to-day needs.

Positive Outlook

The positive outlook is based on our expectation that FCA will continue to improve its financial metrics further in the current fiscal year thus achieving our trigger levels for a possible upgrade to Ba1.

The positive outlook also assumes that FCA's financial policy to remain conservative with no excessive dividend payouts, a more moderate gross leverage than in the past, a solid liquidity profile and some operational resilience in case of a weakening of FCA's markets

What Could Change the Ratings UP

Qualitatively, upward pressure on FCA's rating could materialize if the company can sustain its current operating profitability and cash flow generation, even if market conditions were to weaken in the US and in Europe. An upgrade of FCA's rating would also hinge on the company's ability to resolve the current legal investigations in the US and Europe surrounding the diesel emissions issues, without a material impact on the company's credit metrics, and without a serious impact on its reputation, as evidenced by a loss of market share.

Quantitatively, an upgrade could occur if FCA were able to achieve (1) a Moody's-adjusted EBITA margin around 6%, (2) a consistently positive and robust free cash flow without compromising on its capital expenditures and R&D expenses needed to achieve emission targets, to manage the transition to alternative fuel vehicles and new drivetrain technologies as well as autonomous vehicles, (3) a reduction in leverage based on Moody's-adjusted (gross) debt/EBITDA sustainably below 2.0x.

What Could Change the Ratings DOWN

FCA's ratings might come under downward pressure should FCA's operating performance and cash flow generation come under significant pressure as a result of market share declines or if market conditions were to weaken in the US and in Europe or material fines would hurt the company's brand image.

A downgrade could occur in case these events would result in the following credit metrics for a sustained period of time: (1) a Moody's-adjusted EBITA margin falling below 4%, (2) a sizable negative free cash flow, or (3) a Moody's-adjusted (gross) debt/EBITDA exceeding 3.5x

STRUCTURAL CONSIDERATIONS

We have considered the senior unsecured notes issued by FCA and its treasury companies as structurally subordinated to a significant portion of financial and non-financial debt (including the remaining USD1.0 billion senior secured term loan B at FCA US), located at the level of FCA's operating subsidiaries largely consisting of trade payables. Consequently, the ratings of FCA's outstanding senior unsecured bonds is Ba3, or one notch below the Ba2 CFR, according to Moody's Loss Given Default Methodology, and the rating assigned to FCA US's secured term loan B is Baa2.

The principal methodology used in these ratings was Automobile Manufacturer Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Having its corporate seat in Amsterdam, the Netherlands, and the place of effective management in the United Kingdom, FCA is one of the world's largest automotive manufacturers by unit sales. Its portfolio of brands includes Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia, Ram, Maserati and Mopar, the parts and service brand. In 2017 FCA generated consolidated net revenues of EUR111 billion and reported an adjusted EBIT of EUR7.1 billion.

Affirmations:

..Issuer: FCA US LLC

....Senior Secured Bank Credit Facility, Affirmed Baa2

..Issuer: Fiat Chrysler Automobiles N.V.

.... Probability of Default Rating, Affirmed Ba2-PD

.... Corporate Family Rating, Affirmed Ba2

....Senior Unsecured Shelf, Affirmed (P)Ba3

....Other Short-Term, Affirmed (P)NP

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Ba3

....Senior Unsecured, Affirmed Ba3

..Issuer: Fiat Chrysler Finance Europe SA

....Backed Other Short-Term, Affirmed (P)NP

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Ba3

....Backed Senior Unsecured, Affirmed Ba3

Outlook Actions:

..Issuer: FCA US LLC

....Outlook, Changed To Positive From Stable

..Issuer: Fiat Chrysler Automobiles N.V.

....Outlook, Changed To Positive From Stable

..Issuer: Fiat Chrysler Finance Europe SA

....Outlook, Changed To Positive From Stable

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Falk Frey
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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