Sept 19 - Fitch Ratings has affirmed Fiat Spa's (Fiat) Long-term
Issuer Default Ratings (IDR) and senior unsecured rating at 'BB' and Short-term
IDR at 'B'. The Outlook on Fiat's Long-term IDR is Negative. The agency has also
affirmed Fiat Finance & Trade Ltd, S.A.'s (FFT) senior unsecured rating at 'BB'.
The affirmation reflects Fitch's expectations that Fiat will manage to limit
cash erosion in the next couple of years, as steady performance in Brazil and
continuous robust performance of the group's other divisions will mitigate cash
absorption in Europe.
The ratings are based on Fiat's standalone credit profile (ex-Chrysler) but
incorporate benefits that are derived from its combination with Chrysler LLC. In
particular, increased operational integration and cooperation with Chrysler,
notably through vehicle development and increasing sharing of powertrains and
components, provide room for further improvement in profitability.
Fiat's earnings have become increasingly reliant on Chrysler as Fiat's
standalone results remained weak in 2011 and H112, hindered principally by
ongoing trading losses (as defined by Fiat, i.e. operating losses before one-off
items) of its mass-market brands in EMEA (EUR0.5bn in 2011 pro-forma including
Chrysler, EUR345m in H112). Conversely, Chrysler's operating margin strengthened
further to 4.5% in H112 from 3.6% in 2011 and 1.8% in 2010 (US GAAP).
However, the current strict ring-fencing of Chrysler's debt and cash flows
limits the benefit of Chrysler's improvements to Fiat's creditors as the latter
have no access to Chrysler's cash at a time when its standalone cash generation
ability has significantly weakened. Nonetheless, positive free cash flow (FCF)
at Chrysler can enable the group to finance common project developments and
mitigate the lower contribution from Fiat's core cash generation ability.
Pressure on Fiat's revenue and trading margins remains considerable and
underpins the Negative Outlook. Fitch believes that adverse market conditions
will prevail in Europe at least through 2013. The agency expects new vehicle
sales to decline by 7% in 2012 and believes that a further contraction of sales
in Fiat's main European markets in 2013 is highly probable. In addition,
declining industry sales combined with aggressive discounting to try and
preserve market shares will have an extremely negative impact on underlying
funds from operations (FFO). Potential adverse movements in working capital,
either from increasing inventories or unfavourable payment terms to support
suppliers may bite further in cash generation.
Fitch could downgrade the rating if it believes that revenue, profitability and
cash flow will decline more than its base case. The agency currently projects
trading margin to be at 6.5%-7.0% in NAFTA in 2012-2013 and remain poor in EMEA
at negative 3.0%-3.5%. FCF should be slightly negative in 2012-2013, before
corporate activity, in particular further stake increases in Chrysler in H212
The group follows a conservative financial strategy and has ample liquidity.
Fiat's industrial operations excluding Chrysler reported EUR9.8bn in cash and
equivalents at end-June 2012, further bolstered by EUR1.95bn of undrawn
committed credit lines. This largely covers EUR6.6bn of debt maturing in
2012-2013 for Fiat excluding Chrysler, as well as the negative FCF projected by
Fitch in 2012-2013. Chrysler has EUR0.5bn of debt maturing in 2012-2013, largely
covered by EUR9.6bn in cash and marketable securities and EUR1bn of undrawn
committed credit lines.
WHAT COULD TRIGGER A RATING ACTION?
Future developments that may, individually or collectively, lead to a positive
rating action include:
- Sustained positive FCF
- Higher margins at Fiat auto mass market, EMEA and group level
Future developments that may, individually or collectively, lead to a negative
rating action include:
- Sustained fall in revenue and operating margins
- Mounting liquidity issues, including refinancing concerns
- Consolidated FFO gross adjusted leverage above 3x on a sustained basis
- Evidence of tangible support to Chrysler
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable criteria, 'Corporate Rating Methodology' dated 8 August 2012 is
available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology