Approximately EUR8.3 billion of debt affected
Frankfurt am Main, September 21, 2011 -- Moody's Investors Service has today downgraded the corporate family
rating (CFR) and probability of default rating (PDR) of Fiat S.p.A.
("Fiat") to Ba2 from Ba1. Concurrently, following
application of the Loss Given Default Methodology, Moody's
has also downgraded the debt issued by Fiat's rated subsidiaries
Fiat Finance & Trade, Fiat Finance North America and to Ba3
from Ba1 as well as Fiat Finance Canada's provisional rating to
(P)Ba3 from (P)Ba1. The outlook on the ratings is negative.
This concludes the review for downgrade initiated on 26 April 2011 following
Fiat's stake increase in Chrysler Group LLC ("Chrysler",
B2, positive outlook).
RATINGS RATIONALE
"Today's rating action reflects Moody's expectation
that the creditworthiness of Fiat and Chrysler will become more closely
aligned over time as the strategy and operations of the two groups becomes
progressively more intertwined ," says Falk Frey, a
Moody's Senior Vice President and lead analyst for Fiat.
The intensified use of common vehicle architectures, modules and
drivetrain technologies increases mutual dependency, which could
result in the two companies having to support each other in the event
of financial difficulty. This is despite Fiat not guaranteeing
Chrysler's debt (and Moody's understands that Fiat has no
intention to set up guarantees for the benefit of Chrysler) and the fact
that the financial management and arrangements of the two companies remain
separate.
Moody's also notes that there are cross-default clauses included
in the bonds issued by Fiat under its Global Medium Term Note programme
that point to the financial linkage between two companies.
Downgrades:
..Issuer: Fiat Finance & Trade Ltd.
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)Ba3 from (P)Ba1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Ba3 from Ba1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Ba3 from Ba1
..Issuer: Fiat Finance Canada Ltd.
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)Ba3 from (P)Ba1
..Issuer: Fiat Finance North America Inc.
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)Ba3 from (P)Ba1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Ba3 from Ba1
..Issuer: Fiat S.p.A.
.... Probability of Default Rating,
Downgraded to Ba2 from Ba1
.... Corporate Family Rating, Downgraded
to Ba2 from Ba1
Outlook Actions:
..Issuer: Fiat Finance & Trade Ltd.
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Fiat Finance Canada Ltd.
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Fiat Finance North America Inc.
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Fiat S.p.A.
....Outlook, Changed To Negative From
Rating Under Review
The Ba2 rating also reflects (i) Fiat's business risk, with
a pure focus on the highly cyclical automotive industry, including
through its stake in Chrysler Group and the activities of Magneti Marelli
(automotive components) and Teksid (supplier of engine blocks),
as well as Comau (industrial automation systems for the auto industry)and
Fiat Powertrain (operating mainly as an internal supplier of engines and
transmissions); and (ii) Moody's view that Fiat has a relatively
infrequent model renewal rate overall compared with some of its direct
peers, and that this is constraining the group's competitive
position. In Moody's view, this was also reflected
by Fiat's market share losses in Europe and its domestic market
of Italy in 2010 and in the year to date.
In addition, the Ba2 rating takes into consideration a substantial
increase in Fiat's capital expenditure (capex) in the current year
and beyond compared with a reduced level in 2010. This is a result
of the group's strategy to develop and launch attractive new volume
models to the market.
Furthermore, Moody's notes that Fiat will be vulnerable to
greater competitive pressure arising from weaker market demand,
increasing price pressure and growing overcapacities in Brazil,
its most profitable market. The latter is the result of the substantial
additional capacity that will be implemented over the next three years
within the country. Based on public announcements from car manufacturers,
Moody's calculates an increase of approximately 50% in total
Brazilian available production capacity by 2014. Such a rise will
significantly outpace Moody's market growth expectations,
thereby resulting in overcapacities with the likely consequence of declining
profitability.
Moody's understands that Fiat and Chrysler are currently fine tuning
their product and production plans. In the rating agency's
view, possible decisions to delay the introduction of major new
models could result in the group's competitive positioning being
weakened, market share losses and continued under-absorption
of fixed costs, especially in Europe.
However, at the same time, the inclusion of Chrysler in Moody's
analysis positively affects Fiat's previously very limited geographic
diversification. Moody's had viewed this lack of geographic
diversification as a key weakness in Fiat's previous 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, especially 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 positions 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 a weakening economy
as a result of the debt crisis could negatively affect car demand in the
group's key market.
Moody's rating anticipates that, although it could be challenging,
Fiat will be able to contain further market share losses within the next
two years before regaining market shares in Europe as a result of its
attractive renewed model range. Moody's anticipates that
the launch schedule will accelerate from 2012 onwards.
Moody's considers Fiat's liquidity profile to be good,
excluding Chrysler and the unknown amount of cash outflow that would be
involved if Fiat were to exercise its option to purchase 40% of
the current stake of the VEBA Trust in Chrysler. As of 30 June
2011 the group (excluding Chrysler) had EUR12.0 billion in cash,
to which a Dual Tranche Bond totalling EUR1.5 billion and a new
EUR1.75 billion Revolving Credit Facility maturing in July 2014
(substituting the existing EUR1.0 billion RCF) were added in July
. In Moody's view, these sources should cover the anticipated
uses of cash for the next 12 months. These uses comprise (i) capex;
(ii) debt maturities; (iii) cash for day-to-day needs;
(iv) approximately EUR500 million for the 6% stake in Chrysler
from the UST, the 1.5% stake from the Canadian government
and the UST rights under the Equity Recapture Agreement between the UST
and VEBA; (v) dividends to be paid in 2012.
OUTLOOK
The negative outlook reflects the execution risk regarding the organisational
and, more importantly, the operational integration of Chrysler
and Fiat. It also reflects Fiat's ambitious management plans
for 2012 and beyond to strengthen its operating margins from current levels.
This is driven by the group's introduction of new models and the
optimisation of its industrial capacity. In this regard,
Moody's believes that 2012 will be an important year in terms of
validating Fiat's strategy of using Chrysler platforms for products
to be sold in Europe and branded as Fiat, Lancia or Alfa Romeo cars
in Europe. Positive achievements should result in Fiat increasing
capacity utilisation rates in its domestic plants, regaining market
shares as well as improving its profitability in Europe. Increased
profitability in Europe will reduce the group's dependency on the
Brazilian market, which in Moody's view could become more
challenging going forward. However, the negative outlook
reflects that these plans could be derailed by adverse macroeconomic developments,
notably in Western Europe.
The outlook could be stabilised if Fiat were to successfully execute the
integration of Chrysler, measured by the milestones of achievement
listed above. A more stable positioning within the Ba2 rating category
could also result if Chrysler were able to further improve its ratings.
WHAT WOULD CHANGE THE RATINGS -- DOWN
Moody's would consider downgrading Fiat's ratings in the event
of (i) a further erosion of Fiat's market share in Europe,
resulting from the group's possible decision to deviate from its
current launch schedule and delay the introduction of new models;
(ii) any emerging evidence that management's industrial plans are
not working or have been delayed; (iii) high triple digit million
Euro negative free cash flow generation in 2012; (iv) Debt/EBITDA
not falling below 4.0x; or (v) a deterioration in Chrysler's
operating performance, which would be in contrast to Moody's
expectation of improvements in profitability.
STRUCTURAL CONSIDERATIONS
The senior unsecured notes issued by Fiat's funding vehicles Fiat
Finance &Trade, Fiat Finance North America and Fiat Finance
Canada (currently no 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.
METHODOLOGY
The principal methodology used in rating Fiat S.p.A.
was the 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. On 1 January 2011,
the group completed the demerger of its capital goods activities,
mainly Iveco and CNH (Ba2, stable outlook), into a separate
company, called Fiat Industrial (Ba1, stable outlook).
On a pro-forma basis, the new Fiat S.p.A.
generated consolidated revenues of EUR35.9 billion and reported
a trading profit of EUR 1.1 billion in 2010.
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 rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following :
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service information, and
confidential and proprietary Moody's Analytics information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
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and cannot in every instance independently verify or validate information
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The date on which some ratings were first released goes back to a time
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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's rating to Ba2; negative outlook
