Approximately EUR9.3 billion of debt affected
Frankfurt am Main, October 10, 2012 -- Moody's Investors Service has today downgraded the corporate family
rating (CFR) and probability of default rating (PDR) of Fiat S.p.A.
to Ba3 from Ba2. Concurrently, Moody's has also downgraded
the debt issued by Fiat's rated subsidiaries Fiat Finance &
Trade and Fiat Finance North America to B1 from Ba3 as well as the rating
of Fiat Finance Canada to (P)B1 from (P)Ba3. The outlook on the
ratings is negative.
Downgrades:
..Issuer: Fiat Finance & Trade Ltd.
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)B1 from (P)Ba3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to B1 from Ba3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to B1 from Ba3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to B1 from Ba3
..Issuer: Fiat Finance Canada Ltd.
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)B1 from (P)Ba3
..Issuer: Fiat Finance North America Inc.
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)B1 from (P)Ba3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to B1 from Ba3
..Issuer: Fiat S.p.A.
.... Probability of Default Rating,
Downgraded to Ba3 from Ba2
.... Corporate Family Rating, Downgraded
to Ba3 from Ba2
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)B1 from (P)Ba3
RATINGS RATIONALE
"The one-notch downgrade of Fiat's ratings to Ba3 reflects
the decline in demand for Italian cars recorded so far this year and in
our outlook for demand till the end of 2012 and beyond. Italy represents
more than half of Fiat's European car registrations and as such
the deterioration is the key driver of the rising losses among its mass
market brands and of its cash consumption in EMEA region,"
says Falk Frey, a Moody's Senior Vice President and lead analyst
for Fiat.
Although Fiat's consolidated financial results benefit from the
improving performance of Chrysler Group LLC, the Fiat bondholders
do not have full access to the cash flows from this entity, nor
does Moody's anticipate a major change in this access over the short
term. "This leads Moody's to expect further deterioration
in Fiat's standalone credit metrics in 2012, with limited
improvement likely in 2013," Mr. Frey adds.
When disaggregating Chrysler's financials from Fiat's consolidated
accounts, it becomes clear that Fiat's standalone credit metrics
have deteriorated over recent quarters, as evidenced by an adjusted
debt/EBITDA of around 8.0x and negative free cash flow of approximately
EUR2.8 billion in the last twelve months ending in June 2012.
Fiat's mass market brands (excluding Chrysler) are not only very
reliant on the European passenger car market, which represents around
60% of revenues, but are also heavily focused on the Italian
market, which accounted for 52% of Fiat & Chrysler's
registrations for the period January-August 2012. Moody's
anticipates western European light vehicle demand to decline by 8%
in the current year and a further 3% in 2013. Moody's
projects demand in Italy to contract by 20% this year and to stabilize
(+1.4%) at that low level next year. In addition,
rising price pressures and rebates in Europe will exacerbate the negative
effect on Fiat's performance. Moody's notes that the
Luxury and Performance brands business supported the overall Group performance
with an EBIT of €175 million in H1 '12 and an EBIT margin of
12.2%.
In Italy, Fiat is facing significant overcapacities despite the
closure of its factory in Sicily at the end of last year. In Moody's
opinion, Fiat original target of reaching a break-even point
in trading profits from the EMEA region by 2014 has become very challenging
in this much worsened environment, especially in light of current
year trading losses for the Region, which Moody's expects
around EUR800 million for the current year. Moreover, the
company intends to achieve its target without any further immediate capacity
adjustments but instead plans to increase the production of Chrysler Group
models on its European platforms in order to increase its scale and lower
its unit costs.
Furthermore, Moody's cautions that the delay in model renewals
and the absence of any major new volume model launch might further derail
Fiat's competitive position in Europe, against the background
of major new model launches from its competitors Peugeot (208) and Renault
(Clio). Fiat's also renews existing models, in Moody's
view, less frequently overall than its direct peers. These
slower renewals are constraining Fiat's competitive position,
as reflected in the group's market share losses since 2010 in Western
Europe .
The Ba3 rating also reflects Fiat's business risk of its pure focus
on the highly cyclical automotive industry, including through its
stake in the Chrysler Group and the activities of Magneti Marelli (automotive
components), Teksid (supplier of engine blocks), Comau (industrial
automation systems for the auto industry).
Moody's also notes that Fiat could be vulnerable to greater competitive
pressures in Brazil, still its most profitable market. Moody's
concerns are based on the substantial additional capacity that will be
implemented over the next two to three years within the country that will
significantly outpace Moody's market growth expectations,
leading to overcapacities with the likely consequence of declining profitability.
Moody's views as positive the inclusion of Chrysler which has helped
improve Fiat's previously very limited geographic diversification.
Moody's had previously considered this lack of geographic diversification
as a key weakness in Fiat's business profile.
Moreover, Moody's has taken into account the potential cost
savings resulting from the increasing operational integration between
Fiat and Chrysler regarding common architecture, modules and technologies
as well as purchasing. A positive market acceptance of Fiat's
new models, including the Lancia-branded Chrysler derivatives,
would improve the currently very low capacity utilisation rates in Fiat's
European plants and positively affect fixed-cost coverage.
Fiat's ratings also benefit from its leading market position in
Brazil (with an approximate market share of 23%), which has
been the group's major source of profits and cash flows in recent
years. In addition, Fiat benefits from a dominant domestic
Italian market presence, with a market share of approximately 30%.
However, sovereign austerity programmes and the weakening Italian
economy as a result of the debt crisis could continue to negatively affect
car demand in the group's second key market (after Brazil and excluding
Chrysler).
The negative rating outlook reflects (i) Fiat's standalone (excluding
Chrysler) cash burn of EUR2.6 billion in the last twelve months
ending on 30 June 2012 and Fiat's challenge to achieve break-even
free cash flow in the short to medium term; (ii) Fiat's weak
model pipeline with no major volume model introductions in the next 12-18
months which might impair the company's market position; as
well as (iii) Fiat's low capacity utilisation rate in Europe with
limited visibility of improvement.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Moody's would consider downgrading Fiat's rating further if
its standalone net industrial cash flow were to exceed a negative EUR2.0
billion in the current year, with no indication of a material improvement
in 2013. The rating could also come under pressure if Fiat were
to lose significant market shares in Europe and/or if the company's
earnings and cash flow contribution from its Brazilian operations,
a major source of cash flow, were to decline, most likely
as a result of rising competitive pressures from new capacities and additional
market entrants.
An upgrade of Fiat's rating is currently very unlikely. For
Moody's to consider an upgrade, Fiat would have to achieve
break-even free cash flow on a standalone basis, with further
indications that it will likely achieve positive free cash flows that
it could use to reduce company debt.
LIQUIDITY
As of 30 June 2012, Fiat's liquidity profile was adequate,
excluding Chrysler and the unknown amount of cash outflow that would take
place were Fiat to exercise its option to purchase 40% of the current
41.5% stake of the VEBA Trust in Chrysler. As of
30 June 2012, the FIAT group (excluding Chrysler) reported EUR10.0
billion in cash and an undrawn EUR1.95 billion Revolving Credit
Facility maturing in July 2014. These sources should cover Fiat's
anticipated cash requirements over the next 12 months, comprising
capital expenditures, debt maturities, cash for day-to-day
needs and minority dividends.
STRUCTURAL CONSIDERATIONS
The senior unsecured notes issued by Fiat's funding vehicles -- Fiat
Finance &Trade, Fiat Finance North America and Fiat Finance
Canada, the latter not currently having any notes outstanding --
are structurally subordinated to a significant portion of debt located
at Fiat's operating subsidiaries (mainly trade payables), with a
preferred claim on the cash flows at these entities. Consequently,
the ratings of Fiat's outstanding bonds are one notch below the group's
CFR, according to Moody's Loss Given Default Methodology.
RATING METHODOLOGY USED
The principal methodology used in rating Fiat was Moody's "Global
Automobile Manufacture Industry Methodology", published in
June 2011. Other methodologies used include "Loss Given Default
for Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA", published in June 2009. Please see
the Credit Policy page on www.moodys.com for a copy of these
methodologies.
Headquartered in Torino, Italy, Fiat S.p.A.
is one of Italy's leading industrial groups and one of Europe's
largest automotive manufacturers by unit sales. Fiat S.p.A.
owns a 58.5% stake in Chrysler Group LLC (rated B2/positive),
generated consolidated group revenues of EUR59.6 billion and reported
a trading profit of EUR2.4 billion in 2011.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant 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.
The ratings have been disclosed to the rated entities or their designated
agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings is of sufficient quality and from sources
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the lead rating analyst and to the Moody's legal entity that has issued
the 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
Eric de Bodard
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
Moody's downgrades Fiat to Ba3; negative outlook
