RPT-Fitch: Fiat Plan Is Ambitious, With High Execution Risks

Fri May 9, 2014 7:24am EDT

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May 9 (Reuters) - (The following statement was released by the rating agency)

Fiat Chrysler Automobiles' new business plan will help tackle the key challenges the group faces but execution risks are high and the financial targets are ambitious, Fitch Ratings says.

The plan to reposition key brands and increase global market shares through a strong product offensive, notably at Jeep and Alfa Romeo, would help counter the weakness of the European car market and continuing competitive pressures. It would also increase production to lower overcapacity.

However, this is not the first attempt to rejuvenate Alfa Romeo and the track record has been poor, with several failed attempts. Given the challenges FCA will face, such as weak demand and a poor macroeconomic environment in some markets, strong product pipelines from various competitors, and the time it takes to change customers' view of a brand, we believe the 2018 market-share targets are ambitious. These include growing its US market share to 15.8% from 11.4% in 2013 and significantly increasing its Chinese market share to 2.8% from 0.6%.

Targets to significantly boost cash generation and cut reported consolidated net debt to less than EUR1bn in 2018 from nearly EUR10bn in 2013 (pro-forma after the acquisition of the remaining ownership interests in Chrysler and retrospective application of IFRS 11) will be equally tough. They are also largely reliant on substantial working capital (WC) inflows for which details have not been provided. In particular, we believe that WC inflows will be highly dependent on revenue growing in line with targets.

FCA's announcement does not affect our 'BB-'/Negative Fiat rating because there is no near-term structural change in the business profile and achieving the group's 2018 targets will depend on execution. Poor operating margins, notably in North America and Latin America, and negative free cash flow in the group's weak first-quarter results highlight the low starting point for the business plan.

The group announced that its plan did not include any capital increase, although it was not completely ruled out, and no asset disposal. A mandatory convertible is currently not on the agenda either.

The planned removal of a ringfence around Chrysler's cash in 2016 following the early repayment of Chrysler bonds would, however, be a significant step. We have previously said this could result in positive rating action if there is no parallel weakening of the group's capital structure. Conversely, a downgrade could be triggered by a fall in profitability, consolidated FFO gross leverage above 3x or Fiat's standalone FFO gross adjusted leverage above 5x, all on a sustained basis.

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