November 29, 2016 / 5:50 PM / a year ago

Fitch Revises FCA's Outlook to Positive; Affirms at 'BB-'

(The following statement was released by the rating agency) BARCELONA/LONDON, November 29 (Fitch) Fitch Ratings has revised Fiat Chrysler Automobiles N.V.'s (FCA) Outlook to Positive from Stable, while affirming the group's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BB-' and Short-Term IDR at 'B'. The agency has also affirmed Fiat Chrysler Finance Europe S.A.'s senior unsecured rating at 'BB-'. The rating action reflects Fitch's projections that free cash flow (FCF) generation, a major credit weakness for the group, will improve in the foreseeable future. Confirmation in the next 12-18 months that FCF will remain positive could lead to an upgrade. The ratings reflect FCA's weak credit metrics, in particular high leverage and limited FCF, and operational challenges, particularly FCA's substantial investment needs. However, they also reflect FCA's solid business profile, including broad product and geographic diversification, robust brands and an ambitious strategy. KEY RATING DRIVERS Strong Earnings, Weak FCF Group adjusted EBIT margin increased to 4.3% in 2015 from 3.9% in 2014. Fitch expects a further strengthening to 5.5%-6% in 2016-2018. In particular, Fitch expects a potential moderate erosion of margins in the US to be fully offset by a recovery in Latam from 2017 onwards and a further strengthening in Europe. FCF is weak for the ratings as funds from operations (FFO) are absorbed by increasing investments to make up for the cuts made in past years. Fitch projects FCF to remain weak in 2016 before gradually improving due to improved underlying profitability. Solid Business Profile Fitch believes that FCA's business profile is consistent with a rating at the high end of the 'BB' category. Despite the recent spin-off of Ferrari, the business profile reflects the group's ambitious strategy and positive track record since the merger with Chrysler, its broad product and geographic diversification, and well-recognised brands. Improving Financial Structure FCA's consolidated gross debt and leverage are high for the ratings, with FFO adjusted gross leverage just below 3x at end-2015. However, the group maintains substantial cash, and consolidated FFO adjusted net leverage is more commensurate with the ratings at below 1.5x. The recent debt restructuring at FCA US formally removed the ring-fencing around its cash and improved the group's financial structure. This should also reduce interest expenses and bolster FFO. Fitch expects FFO adjusted net leverage to decline towards 1x by end-2017. Higher Investments FCA's business plan targets a 52% sales increase between 2013 and 2018, notably by expanding the geographical footprint, reassessing the group's product portfolio via a refocused effort on premium brands and realigning capacity in NAFTA to meet consumer demand for SUVs and pickup trucks. FCA's plan makes strategic sense but carries execution risks. In addition, Fitch believes that FCA is underestimating the effect of, and underinvesting in, growing technologies such as electric powertrains and autonomous driving, notably as competitors boost their efforts in these fields. This should either result in the group lagging behind peers or an acceleration of investment in the medium term to catch up with peers. DERIVATION SUMMARY FCA is the most leveraged auto manufacturer in Fitch's portfolio and with the weakest cash generation, particularly at FCF level. However, this is mitigated by adequate profitability compared with peers in the 'BB' and 'BBB' rating categories. FCA's business profile is also supported by the group's large scale, broad end-market diversification versus other mass-market carmakers and a portfolio of solid brands. No country-ceiling, parent/subsidiary or operating environment aspects impact the ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: -Group revenue to increase slightly in 2016 and grow in low-single digits in 2017-2018; -Group adjusted EBIT margin to increase to 5.9% in 2016 and further towards 6% by 2018, with the NAFTA region's solid profitability offsetting weaker margins in the EMEA and Latam markets; -Capex to decline slightly in 2016 before increasing to EUR9bn-9.5bn in 2017-2018; -No dividend distribution in 2016-2018. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Sustained positive FCF (2015: 0.4%, 2016E: 0.4%, 2017E: 0.7%) -Higher group operating margins (2015: 4.3%, 2016E: 5.9%, 2017E: 5.9%), in particular at auto mass market brands Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Sustained fall in revenue and operating margins, including group adjusted EBIT margin falling below 2% -Consolidated FFO adjusted net leverage above 2.5x on a sustained basis (2015: 1.4x, 2016E: 1.1x, 2017E: 1.0x) -Sustained negative FCF -Mounting liquidity issues, including refinancing risk LIQUIDITY Healthy Liquidity FCA reported EUR13.9bn in cash and equivalents at end-3Q16, excluding Fitch's EUR3.1bn adjustments for minimum operational cash. Liquidity is also supported by EUR6.2bn of undrawn revolving credit facilities (RCF) at end-September 2016. This largely covers debt of EUR9.6bn maturing over 4Q16 and 2017. In June 2016, the maturity of the first EUR2.5bn tranche of the RCF was extended to July 2019. The maturity of the second EUR2.5bn tranche of the RCF remained unchanged (June 2020). At end-September 2016, undrawn committed credit lines totalled EUR6.2bn, including the EUR5bn RCF and approximately EUR1.2bn of other revolving credit facilities. Contact: Principal Analyst Thomas Corcoran Associate Director +44 20 3530 1231 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: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Summary of Financial Statement Adjustments -Fitch adds an 8x multiple of leases, totalling EUR2bn, 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 EUR4.2bn 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. 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