December 15, 2017 / 4:03 PM / a year ago

Fitch Upgrades FCA to 'BB'; Positive Outlook

(The following statement was released by the rating agency) BARCELONA/LONDON, December 15 (Fitch) Fitch Ratings has upgraded Fiat Chrysler Automobiles N.V.'s (FCA) Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BB' from 'BB-'. The Outlook is Positive. The Short-Term IDR has been affirmed at 'B'. The agency has also upgraded Fiat Chrysler Finance Europe S.A.'s and FCA's senior unsecured rating to 'BB' from 'BB-'. The upgrade reflects Fitch's expectations of sustainable positive free cash flow (FCF) as cash absorption has been a major rating constraint. The Positive Outlook reflects our expectations that the FCF margin will increase to more than 1.5% in the foreseeable future, a level commensurate with a higher rating. The ratings also reflect FCA's improved credit metrics, including funds from operations (FFO) net adjusted leverage declining towards less than 1x in 2018 and its solid business profile, including broad product and geographic diversification and robust brands. KEY RATING DRIVERS Strong Earnings, Weak FCF: Adjusted group operating margin increased to 5.5% in 2016 from 4.3% in 2015 and Fitch expects a further strengthening to more than 7% by 2019. We expect all regions to contribute positively to group margin improvement. The product portfolio has strengthened and decreasing investments in recent years have had a positive impact on the depreciation rate. However, FCF remains on the weak side for the ratings, especially considering the lack of dividends and declining capex ratio in past years. Nonetheless, Fitch projects FCF to improve gradually in the coming years thanks to better underlying profitability, lower cash interest paid and the absence of dividend resumption, which should offset some of the cash tax increase. Improving Financial Structure: FCA's consolidated gross debt and leverage have been high for the ratings despite continuous improvement since 2014. FFO adjusted gross leverage was just above 2.5x at end-2016, down from more than 4x at end-2014. However, the group maintains substantial cash, and consolidated FFO adjusted net leverage below 1.5x is more commensurate with the ratings. The debt prepayments and amendments at FCA US formally removed the ring-fencing around its cash and improved the group's financial structure. This will also reduce interest expenses and bolster FFO. Fitch expects FFO adjusted net leverage to decline towards less than 1x by end-2018. Solid Business Profile: Fitch believes that FCA's business profile is consistent with a low investment grade rating. The business profile reflects the group's positive track record since the merger with Chrysler, its broad product and geographic diversification, and its diversified portfolio of well-recognised global brands. This is despite the spin-off of Ferrari in early 2016. Disruptive Sector Trends: FCA has limited investments in major fundamental trends reshaping the industry such as powertrain electrification, autonomous driving and new mobility services including car sharing and ride hailing. This has safeguarded its cash generation but could leave the company falling behind in a rapidly changing sector. However, we expect further investments in these fields and the signing of new alliances following FCA's recent announcement that it has joined BMW, Intel and Mobileye in the development of an autonomous driving platform. Group Structure Development: The group's history includes many disposals and acquisitions and the CEO has been vocal about his intention to participate in further industry consolidation. We expect further corporate reorganisation in the next 12-18 months, under the final months of the current CEO's tenure and possibly additional moves during the upcoming 2018-2022 plan under new management. Options include a complete or partial disposal or spin off of the components businesses or of the premium brands, including Alfa Romeo or Maserati, although we believe the probability of the latter is low in the short term. DERIVATION SUMMARY FCA remains the most indebted auto manufacturer in Fitch's portfolio, despite continuous deleveraging since 2014, and the one with the weakest and least steady cash generation. Jaguar Land Rover (JLR) is currently going through a period of weak FCF, lower than FCA, but this is driven by a sharp increase in capex to prepare for future models and strengthen its manufacturing footprint. All other manufacturers have now moved to sustained FCF generation. However, Fitch expects FCF to improve continuously and profitability is adequate compared with peers in the 'BB' and 'BBB' rating categories. Strong earnings generated in North America and improving results in other regions lead to comfortable operating margins comparing favourably with higher-rated PSA, Renault and Ford. FCA's business profile is also supported by its large scale, solid brand and broad end-markets diversification versus other mass-markets carmakers rated in the 'BB' and 'BBB' categories such as Renault and PSA. However, FCA is less advanced than most of its close peers in the field of alternative powertrains, such as hybrid and electric vehicles, autonomous driving and new mobility services and car ownership options. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: -Group revenue to increase by 2% in 2017 and grow by about 15% in 2018 and mid-single digits in 2019; -Group EBIT margin to increase to more than 6% in 2017 and increase further to more than 7% by 2019, due to still robust profitability in the NAFTA region, further strengthening in Europe and a gradual recovery in Latin America and Asia; -Capex about stable in 2017 and to increase to EUR10.0 billion-EUR10.5 billion in 2018-2019; -No dividend distributed in 2017-2019; -No specific M&A incorporated in our rating case as this will be treated on a case by case basis when announced. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -FCF sustainably above 1.5% (2016: 0.4%, 2017E: 1.7%, 2018E: 2.1%) -FFO adjusted net leverage sustainably below 1.5x (2016: 1.3x, 2017E: 1.2x, 2018E: 0.9x) -Sustained success of the Jeep and Maserati expansion and Alfa Romeo rejuvenation Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -FCF sustainably below 1% -FFO adjusted net leverage sustainably above 2x -CFO / adjusted debt below 25% -Increasingly lagging behind developing fundamental industry trends LIQUIDITY Healthy Liquidity: FCA reported EUR12 billion in cash and equivalents at end-3Q17, excluding Fitch's EUR3.1 billion adjustments for minimum operational cash. Liquidity is also supported by EUR7.6 billion of committed credit lines at end-September 2017. This largely covers debt of EUR7.7 billion maturing over 4Q17 and 2018. The group also follows a conservative financial strategy aiming to maintain a robust gross cash position as protection against the next cyclical downturn. Liquidity has declined compared with end-2016 notably because of the voluntary prepayment of the outstanding principal and accrued interest of FCA US's tranche B term loan maturing in May 2017 for EUR1.7 billion, the repayment in 2017 of two large notes and other long-term debt for a total EUR3 billion, and negative FX movement of EUR1.1 billion. Contact: Principal Analyst Aurelien Jacquot Associate Director +33 1 4429 9137 Supervisory Analyst Emmanuel Bulle Senior Director +34 93 323 84 11 Fitch Ratings Espana S.A.U. Av. Diagonal 601 08028 Barcelona Committee Chairperson Paul Lund Senior Director +44 20 3530 1244 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: Summary of Financial Statement Adjustments -Fitch adds an 8x multiple of leases, totalling EUR2.7bn, to debt in line with its methodology. -Fitch adjusts year-end cash balances by EUR3.1bn to account for operational cash requirements and seasonal working capital. -Derecognised receivables of EUR5.5bn are added to debt. Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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