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Rating Action:

Moody's downgrades Fiat's CFR to B1; stable outlook

11 Feb 2014

Approximately EUR11.9 billion of debt affected

Frankfurt am Main, February 11, 2014 -- Moody's Investors Service has today downgraded the corporate family rating (CFR) and the probability of default rating (PDR) of Fiat S.p.A. to B1 from Ba3 and to B1-PD from Ba3-PD, respectively. Concurrently, Moody's has downgraded to B2 from B1 the debt issued by Fiat's rated subsidiaries, Fiat Finance and Trade Ltd. S.A. and Fiat Finance North America Inc., as well as Fiat Finance Canada Ltd.'s (P)B2 rating. Additionally, all (P)NP ratings have been confirmed. The outlook on all ratings has been changed to stable from negative.

This rating action concludes the review for downgrade initiated on 7 January 2014.

"We have downgraded Fiat's ratings following its weaker-than-expected performance in fiscal year 2013 and our view that the company faces significant challenges in terms of achieving its outlook guidance for the current fiscal year, " says Falk Frey, a Moody's Senior Vice President and lead analyst for Fiat. "We are also concerned that Fiat may not be able to offset any further profitability deterioration in its Latin American operation through anticipated improvements in other regions and in its Luxury and Performance division," Mr. Frey added. The action also considers the EUR1.27 billion cash outflow in connection with the company's 100% ownership of Chrysler Group LLC (B1 stable).

RATINGS RATIONALE

-- DOWNGRADE OF CFR AND PDR TO B1 AND B1-PD, RESPECTIVELY--

Today's ratings action reflects Fiat's weaker-than-expected financial performance in 2013 fiscal year. The company reported net revenues of EUR86.8 billion and a trading profit of EUR3.4 billion for fiscal year 2013, which fell slightly short of its guidance range of EUR3.5-3.8 billion and compares unfavourably with revenues and trading profit in fiscal year 2012 of EUR84.0 billion and EUR3.5 billion, respectively. Excluding Chrysler, Fiat generated revenues of EUR35.6 billion in fiscal year 2013, which is on a par with its fiscal 2012 results, and a trading profit of EUR246 million, which represents a significant drop compared with EUR338 million in the previous fiscal year.

While the Fiat Group's consolidated cash flow from operating activities net of capital expenditure (capex) was slightly positive (EUR79 million) in fiscal year 2013, the reported cash flow from operating activities net of capex for Fiat (excluding Chrysler) was a negative EUR1.6 billion compared with a negative EUR2.8 billion in fiscal year 2012 partly driven by a positive working capital inflow of EUR1.1 billion in fiscal year 2013 compared with an outflow of EUR0.6 billion in fiscal year 2012. Fiat's (ex Chrysler) net industrial debt increased to nearly EUR6.9 billion at 31 December 2013 from EUR5.0 billion in the previous fiscal year.

Fiat's guidance for fiscal year-end 2014 is for consolidated net industrial debt in the range of EUR9.8-10.3 billion. This includes an amount of EUR2.7 billion in relation to the Q1 2014 acquisition of the remaining Chrysler stake as well as a EUR0.3 billion IFRS 11 adjustment. Consequently, the Fiat Group expects negative operational cash flow of between EUR0.1-0.6 billion for fiscal 2014. Moody's understands that, on a standalone basis, Chrysler is anticipating positive free cash flow (FCF) from operating activities for fiscal year 2014 in the USD0.5-1.0 billion range. This will result in anticipated cash consumption for Fiat (excluding Chrysler) of up to EUR1.0 billion. Moody's believes that it will be challenging for Fiat to meet its targets for fiscal year 2014, given the profitability deterioration in Latin America, the weakening local currencies and rising competitive pressure in the Brazilian car market.

Given that Fiat bondholders will be unable to fully access Chrysler's on balance sheet cash and the cash flow it generates, Moody's intends to maintain separate CFRs for Chrysler and Fiat for the time being. However, it is likely that these would merge over time to the extent that the financing arrangements of the two entities converge.

Fiat's B1 rating negatively reflects (1) constraints on the company's access to the cash and cash flows of Chrysler and Moody's expectation that this situation is unlikely to change in the short term (e.g., within the existing covenant limits in the bond and loan documentation of Chrysler, dividend payouts are limited to 50% of the net income basket, while intercompany lending to Fiat is feasible with the only limitation that it has to be done on an arm's length basis); (2) the weak standalone credit metrics of Fiat as evidenced by an estimated Moody's-adjusted debt/EBITDA of around 10.3x and reported negative free cash flow of EUR1.5 billion for fiscal year 2013 with limited improvement likely in fiscal year 2014; (3) Fiat's (excluding Chrysler) high reliance on the European passenger car market, particularly in its Italian home market, which represents approximately half of Fiat's European car registrations; (4) rising price pressures and rebates in Europe; (5) rapidly eroding profitability in Latin America (mainly Brazil) driven by increasing competition, additional capacities, high price pressure and the weakness of the Latin American exchange rates against the euro; (6) the group's significant overcapacities in Italy with no immediate plan for further capacity adjustment, with Fiat planning to utilize EMEA production base to develop its global brands (Alfa Romeo, Maserati, Jeep and the Fiat 500 "family"); and (7) the risk that the delay in model renewals and the absence of any major new volume model launch in 2014 might further derail Fiat's competitive position in Europe.

On the positive side, Fiat's rating also takes into account (1) the inclusion of Chrysler, which has helped to improve Fiat's previously very limited geographic diversification and potential cost savings from increasing operational integration between Fiat and Chrysler (e.g., common architecture, modules and technologies as well as purchasing and world class manufacturing); (2) a strong and growing profit contribution from Fiat's Luxury and Performance division (namely, Maserati and Ferrari), which is driven by a widening product offering; (3) its leading market position in Brazil (with an approximate market share of 21.5% in 2013), which has been the group's major source of profits and cash flows in recent years; and (4) a dominant domestic Italian market presence, with a market share of approximately 29%. However, sovereign austerity programmes and the debt crisis' adverse impact on the Italian economy could continue to negatively affect car demand in the group's key market.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectations that (1) Fiat (excluding Chrysler) would be able to limit negative operating FCF to below EUR1.5 billion in fiscal year 2014; (2) Fiat's losses in Europe, the Middle East and Africa from its mass market brands can be further reduced in the current year towards breakeven levels anticipated to be achieved in mid-decade; (3) Maserati's model expansion programme will further increase profits from the Luxury and Performance division; (4) consolidated negative FCF will be limited to around EUR1.0 billion. Furthermore, the stable outlook anticipates that profitability deterioration in Fiat's Latin American operations can be offset by improving performance from other regions and in its Luxury and Performance division. A weakening performance at Chrysler could also put pressure on Fiat's ratings.

LIQUIDITY

As of 31 December 2013, Fiat's liquidity profile on a standalone basis was deemed adequate, after the approximately EUR1.27 billion cash outflow for the acquisition of the remaining membership interests in Chrysler in the first quarter of 2014. As of 31 December 2013, the Fiat Group (excluding Chrysler) reported EUR9.8 billion in cash and marketable securities in the industrial business, as well as an undrawn EUR2.1 billion revolving credit facility maturing in July 2016, which contains conditionality language in the form of financial covenants with significant headroom. These funding sources should cover Fiat's anticipated cash requirements over the next 12-18 months, which comprise capex, debt maturities, cash for day-to-day needs and minority dividends.

STRUCTURAL CONSIDERATIONS

The senior unsecured notes issued by Fiat's treasuries -- Fiat Finance &Trade, Fiat Finance North America and Fiat Finance Canada, with the latter not currently having any notes outstanding -- are structurally subordinated to a significant portion of liabilities 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 currently one notch below the group's CFR, according to Moody's Loss Given Default Methodology.

WHAT COULD CHANGE THE RATINGS DOWN/UP

Moody's could downgrade Fiat's ratings if the company failed to limit its standalone negative net industrial free cash flow to EUR1.5 billion in fiscal year 2014, with no indication of a material improvement in fiscal year 2015. The rating could also come under downward pressure if (1) Fiat was to lose significant market share in Europe; and/or (2) the company's earnings and cash flow contribution from its Brazilian operations, a major source of cash flow, were to decline to an extent that it cannot be offset by anticipated improvements in its other regions and its Luxury and Performance division. Negative pressure could also develop if the Chrysler product renewal programme was to stall as evidenced by the group's inability to generate a trading profit of around EUR3.0 billion on a consolidated basis.

Upward pressure on Fiat's rating could come if Fiat standalone would be able to achieve positive FCF exceeding EUR1.0 billion that will be used to reduce debt and, on a consolidated basis, could generate significantly more than EUR4.0 billion in trading profit in fiscal year 2014, with visibility of further improvements in 2015 and beyond.

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings was the Global Automobile Manufacturer Industry 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. who owns 100% of Chrysler (B1 stable), generated consolidated group net revenues of EUR86.8 billion and reported a trading profit of EUR3.4 billion in the fiscal year 2013.

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 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 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 rating action, and whose ratings may change as a result of this 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

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's CFR to B1; stable outlook
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