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Rating Action:

Moody's changes Fiat Chrysler's outlook to positive and affirms Ba3 rating

Global Credit Research - 30 Mar 2017

Note: On April 04, 2017, the press release was corrected as follows: in the fourth sentence of the second paragraph of the Ratings Rationale section, “EBITA” was changed to “EBIT”; in the third sentence of the Liquidity paragraph of the Ratings Rationale section, the maturity dates were changed to April 2020 and March 2022. Revised release follows.

Note: On April 12, 2017, the press release was corrected as follows: The last sentence of the third paragraph of the Ratings Rationale section was changed to the following: “However, we believe that eventual fines resulting from these investigations could still be accommodated within FCA’s Ba3 rating, given that the possible fines in the US constitute a statutory maximum and that a European Commission consultation process between Italian and German authorities on the diesel emission issues in the light of the steps previously taken voluntarily by the company to modify its emission controls on the affected vehicles resulted in no further action being requested.” Revised release follows.

Frankfurt am Main, March 30, 2017 -- Moody's Investors Service ("Moody's") has today affirmed the Ba3 corporate family rating (CFR) and the Ba3-PD probability of default rating of Fiat Chrysler Automobiles N.V. (Fiat Chrysler, FCA). The outlook on the ratings of Fiat Chrysler was changed to positive from stable.

"Fiat Chrysler's outlook change to positive reflects the company's improved operating performance in fiscal year 2016, its continued efforts to delever its balance sheet as well as its recovering market share in Europe since 2015," says Falk Frey, a Senior Vice President and lead analyst for Fiat Chrysler.

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

RATINGS RATIONALE

Today's action reflects significant improvements in FCA's profitability during 2016, the company's continued reduction in gross debt and, hence, improvements in its financial metrics which positions it strongly in the Ba3 rating category. FCA increased its EBITA margin to 4.2% from 2.4% in 2015 (as adjusted by Moody's), mainly as a result of efficiency gains in purchasing and manufacturing as well as a more favourable product mix. After the company's profitability slightly but continuously decreased since 2012, it has now recorded profitability improvements in all of its reported segments. This resulted in positive free cash flow generation, reaching almost EUR1.8 billion (Moody's adjusted) in 2016, which is, however, still relatively low compared to the company's revenue which totalled EUR111 billion in the same year. Coupled with the company's continued efforts to reduce its gross debt, which resulted in a further reduction in leverage (gross debt/EBITDA) to 3.3x from 5.3x in 2015, and coupled with a very high cash balance of EUR17.4 billion, Moody's views the group as strongly positioned in the Ba3 rating category.

At the same time, Moody's cautions that the operational improvements have been supported by strong market growth in Europe and the US. The growth in the overall US market in recent years has been meaningfully supported by a very high level of consumer debt financing. This has now reached a concerning level with a high share of subprime lending and structures that even provide financing that is above the market value of cars. Given that the US is FCA's most important market where it sold 47% of its total units in 2016 and generated by far the majority of its profit (84% of the company's adjusted EBIT in 2016 was generated in the NAFTA region), this makes the performance of the company vulnerable to a potential downturn in the US. FCA already saw a volume decline by 11% year-on-year (ex-Maserati) in the first two months of 2017 in the US, mainly due to the previously announced phase out of the Chrysler 200 and Dodge Dart. However, this was mitigated by EU+EFTA unit sales increasing by 12% in the same period. Moody's positively highlights that FCA showed signs of a recovery in its market share in Europe over the last two years, now reaching 6.5% (EU28+EFTA), after having experienced continuous decline since it reached a peak at 8.8% in 2009. The recent introduction of two new Alfa Romeo models (Giulia and Stelvio), further improvement in the penetration of the Jeep brand, and an ongoing expansion of the Maserati brand should help FCA to improve turnover and profitability in Europe in an otherwise flat car market.

During 2017, FCA aims to further reduce debt by repaying maturing capital market debt with cash on hand which is supported by positive free cash flow generation and improving EBITDA, further reducing leverage towards around 2.3x to 2.6x. However, this might be jeopardised if the ongoing investigations into the diesel emission issues in the US and Europe result in material fines. 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, FCA could theoretically face fines of up to $4.6 billion in the US (does not include possible criminal fines and civil damages) according to information from the EPA. In addition, in February 2017, the French prosecutors have opened a similar case, increasing further the legal uncertainties for the company. However, we believe that eventual fines resulting from these investigations could still be accommodated within FCA’s Ba3 rating, given that the possible fines in the US constitute a statutory maximum and that a European Commission consultation process between Italian and German authorities on the diesel emission issues in the light of the steps previously taken voluntarily by the company to modify its emission controls on the affected vehicles resulted in no further action being requested.

Rationale for the positive outlook

The positive outlook is based on our expectation of FCA sustaining its improved operating margin and debt-protection ratios over the next 12 months despite possible fines following current legal investigations into the company's diesel emission issues.

The positive outlook also assumes that FCA will be able to weather the challenging landscape as a result of heavy investment requirements for (1) alternative propulsion technologies; (2) autonomous driving; (3) the shift of production capacities towards alternative fuel vehicles; (4) connectivity; as well as (5) regulations relating to vehicle safety, emissions and fuel economy.

What could change the rating Up

Upward pressure on FCA's rating could materialise if the company is able to demonstrate sustainability in 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 its 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 maintain achieved ratios on a sustainable basis, namely (1) a Moody's-adjusted EBITA margin above 4%, (2) a positive free cash flow, (3) a Moody's-adjusted EBITA/Interest Expense trending towards 2.0x and (4) a Moody's-adjusted (gross) debt/EBITDA below 3.5x.

What could change the rating Down

We could downgrade FCA's ratings if (1) the company were to lose significant market share in its key markets; (2) there is evidence that its product renewal program for its key brands were to stall; and (3) its operating performance were to deteriorate with limited prospects for improvement within a reasonable timeline as a result of, for example, a weakening in market conditions in the US, the major source of profits and cash flows for the company, which would more than offset further improvements in other regions and at Maserati.

Quantitatively, downward pressure on FCA's rating would build by (1) the company's Moody's-adjusted EBITA margin falling below 2.5%, (2) Moody's-adjusted (gross) debt/EBITDA increasing above 4.5x or (3) Moody's-adjusted EBITA/Interest Expense falling below 1.5x.

Liquidity

FCA has reduced gross debt (as adjusted by Moody's) by EUR8.4 billion since January 2016 (including EUR1.7 billion related to the prepayment of FCA US's senior secured term loan B in February 2017 and EUR850 million of matured senior unsecured notes issued under the company's GMTN program) and we expect the company to continue reducing debt by using some of its excess cash as well as its free cash flow generated. As at 31 December 2016, FCA's liquidity profile was considered good, underpinned by EUR17.4 billion in cash and marketable securities as well as access to undrawn EUR6.2 billion committed revolving credit facilities (RCFs). The RCFs have today been upsized by EUR1.25 billion and its maturities have been extended, with EUR3.1 billion maturing in April 2020 (with two 1-year extension options available) and EUR3.1 billion in March 2022. These funding sources should cover FCA's anticipated cash requirements over the next 12 months, which comprise principally capex, debt maturities, cash for day-to-day needs and a modest amount of dividends paid to non-controlling interests.

Structural Considerations

On the basis of the unified capital structure following the elimination of the ring fencing at FCA US LLC in March 2016, we have formally included FCA US LLC in our notching 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 B1, or one notch below the Ba3 CFR, according to Moody's Loss Given Default Methodology, and the ratings assigned to FCA US's term loan B are Baa3.

List of affected ratings:

Affirmations:

..Issuer: Fiat Chrysler Automobiles N.V.

....LT Corporate Family Rating, Affirmed Ba3

....Probability of Default Rating, Affirmed Ba3-PD

....Senior Unsecured Medium-Term Note Program, Affirmed (P)B1

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

....Senior Unsecured Regular Bond/Debenture, Affirmed B1

..Issuer: FCA US LLC

....Senior Secured Bank Credit Facility, Affirmed Baa3

..Issuer: Fiat Chrysler Finance Canada Ltd

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)B1

..Issuer: Fiat Chrysler Finance Europe SA

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)B1

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

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed B1

..Issuer: Fiat Chrysler Finance North America Inc.

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)B1

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

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed B1

Outlook Actions:

..Issuer: Fiat Chrysler Automobiles N.V.

....Outlook, Changed To Positive From Stable

..Issuer: FCA US LLC

....Outlook, Changed To Positive From Stable

..Issuer: Fiat Chrysler Finance Canada Ltd

....Outlook, Changed To Positive From Stable

..Issuer: Fiat Chrysler Finance Europe SA

....Outlook, Changed To Positive From Stable

..Issuer: Fiat Chrysler Finance North America Inc.

....Outlook, Changed To Positive From Stable

The principal methodology used in these ratings was Global Automobile Manufacturer Industry published in June 2011. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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
SUBSCRIBERS: 44 20 7772 5454

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

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

No Related Data.
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