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Fitch Affirms Fiat Chrysler at 'BB-'; Outlook Stable
October 20, 2015 / 4:22 PM / 2 years ago

Fitch Affirms Fiat Chrysler at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA/LONDON, October 20 (Fitch) Fitch Ratings has affirmed Fiat Chrysler Automobiles NV's (FCA) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BB-' and its Short-term IDR at 'B'. The agency has also affirmed Fiat Chrysler Finance Europe's senior unsecured rating at 'BB-'. The Outlook on FCA's Long-term IDR is Stable. The ratings reflect FCA's weak credit metrics, in particular high leverage and negative free cash flow (FCF), and major operational challenges, particularly FCA's substantial investment needs. They also reflect FCA's solid business profile, including broad product and geographic diversification, robust brands, ambitious strategy and positive track record as far as the merger and integration of FCA US is concerned. The ratings take into account the group's consolidated credit profile, including FCA US. We do not foresee any direct and immediate impact from the Volkswagen emission test manipulations on FCA. Longer-term, however, uncertainty remains about the potential consequences for carmakers of a potential shift from diesel to gasoline engines, hybrid and electric vehicles. However, the extent and time frame of these effects on the broad auto industry is unclear at this stage. KEY RATING DRIVERS Consolidated Profile Fitch believes that FCA's ratings should reflect the group's consolidated credit profile in the 'BB' rating category rather than FCA's metrics excluding FCA US, which are indicative of the 'B' category. FCA's business profile has strengthened, due to the increased integration of FCA US into FCA. We expect integration to deepen further and to provide more synergies over the medium term. FCA US Ring-Fencing Existing covenants in FCA US's financing documentation limit FCA's access to FCA US's cash. However, in May 2015 FCA redeemed FCA US's senior secured notes due 2019 and we expect FCA to refinance of FCA US's 2021 notes by June 2016. This refinancing, together with the refinancing or amendment of FCA US's credit agreements, will eliminate the current restrictions on the movement of cash within the group. Ambitious Business Plan FCA's five-year business plan targets a 52% sales increase between 2013 and 2018, notably by expanding the company's geographical footprint, reassessing its product portfolio and via a refocused effort on its premium brands. FCA's plan makes strategic sense but will be costly as it entails an acceleration of capex and R&D, and carries substantial execution risk due to brand perception change. Pressure on Earnings We expect Europe and the US to continue improving gradually in 2016. However, this should be mitigated by a sharply declining contribution from what used to be a highly profitable Latin American market. From a cash-flow perspective, improving funds from operations (FFO) will be absorbed by rising investment to make up for the cuts made in past years. We project free cash flow (FCF) to remain negative through at least 2016. Weak Financial Structure FCA's consolidated gross debt and leverage are high for the ratings, with FFO adjusted gross leverage above 4x at end-2014. However, the group maintains substantial cash and consolidated FFO adjusted net leverage is more commensurate with the ratings at 2x. In addition, we expect the group to use its existing liquidity to repay debt through 2016. This should also reduce interest expenses and bolster FFO. We expect FFO adjusted net leverage to decline towards 1.5x by end-2016. The upcoming IPO for an amount to be determined by market valuation and subsequent spin-off of Ferrari should also improve leverage, although the latter will weaken FCA's profitability and business profile. KEY ASSUMPTIONS -Group revenue to increase to EUR110bn in 2015 and grow in high-single digits in 2016-2017, driven chiefly by a lift in the NAFTA and APAC regions; -Group EBIT margin to increase slightly in 2015 and increase to 4.5%-5.6% in 2016-2017, with the NAFTA region growth offsetting weak EMEA and Latam markets; -Capex to increase to about EUR9bn in 2015 and above EUR10bn in 2016-2017.. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include -Sustained positive FCF margin (2014: -0.9%, 2015E: -1.2%, 2016E: -0.1%) -Higher group operating margins (2014: 3.4%, 2015E: 3.9%, 2016E: 4.6%), notably driven by better profitability at Fiat's auto mass market -Full access to FCA US's cash, without weakening the group's capital structure in parallel Negative: Future developments that may, individually or collectively, lead to negative rating action include -Sustained fall in revenue and operating margins, including group operating margin falling below 2% -Consolidated FFO net adjusted leverage above 2.5x on a sustained basis division (2014: 2.0x, 2015E: 2.0x, 2016E: 1.6x) -No sign of FCF becoming positive by end-2016 -Mounting liquidity issues, including refinancing risk. LIQUIDITY FCA reported EUR21.1bn in cash and equivalents at end-1H15, excluding Fitch's EUR2.8bn adjustments for minimum operational cash. Liquidity is also supported by FCA's recently renewed EUR5bn revolving credit facility, currently undrawn. Liquidity is sufficient to largely cover short-term debt. 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. 85 Paseo de Gracia 08008 Barcelona Committee Chairperson Stephen Brown Senior Director +1 312 368 3139 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: 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 Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=992585 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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