Fitch Ratings has run a number of scenarios to assess the potential impact on Fiat Spa’s (BB-/Negative Outlook) financial profile from the contemplated purchase of the remaining stake of Chrysler it does not own. These scenarios are detailed in Fiat’s Proposed Purchase of Chrysler: Scenario Analysis Highlights Risks for Financial Profile.
“We believe that the negative effect on group’s key credit metrics from higher debt will be manageable for the current ratings if the net impact of the purchase (gross price minus potential capital increase) remains below approximately EUR2.5bn. Conversely, the most unfavourable scenario for Fiat, of disbursing more than USD5bn to complete the purchase of Chrysler, could have a negative rating impact if financed only by debt.
Our view is also based on the assumption that Fiat will be able to merge with Chrysler and then refinance Chrysler’s debt, which is a precondition to fully accessing its cash.
Ultimately, Fiat’s ratings will reflect the group’s ability, or lack of, to access Chrysler’s cash and cash flows without restriction.
The alternative scenario of a Chrysler IPO could lead to a downgrade as it could complicate overall group corporate governance and management, in particular because of a fragmented shareholding structure, and lengthen the refinancing process of Chrysler’s debt. However, we believe that an IPO may still be avoided and that a private deal with Chrysler’s other shareholder, the UAW retiree health care trust fund (VEBA) can be reached.” – Fitch Ratings.
In a recent Special Report A Comparison of European Auto Manufacturers’ Credit Profiles, Fitch noted that Fiat and Peugeot remain worse positioned than German carmakers.
“Fiat S.p.A.’s (BB-/Negative) and Peugeot S.A.’s (PSA, B+/Negative) core European automotive operations have been losing money for several years and both groups’ key credit metrics are extremely weak. They have both lost significant market share in Europe and neither company has managed to recover from the latest sector crisis. PSA’s diversification remains poor, while Fiat’s brand power is weak to allow it to compete adequately in the volume segment.
BMW AG, Daimler AG (A-/Stable) and Volkswagen AG (A-/Positive) continue to demonstrate all the attributes of solid investment-grade ratings. They benefit from strong market shares, broad diversification and solid brand attributes. Their financial profiles were relatively resilient during the latest crisis and weakened less than the rest of the sector and recovered quickly.
Renault SA’s (BB+/Stable) performance has also been relatively resilient since the 2008-2009 crisis. It could be upgraded if it can sustain positive automotive profitability in the foreseeable future and its operating margins trend towards 3%.” – Fitch
Last month Moody’s said that Chinese demand is fueling an uptick in the sales growth forecast for global automotive manufacturers, including Fiat and Chrysler.
Like Fitch, Moody’s has a Negative Outlook on Fiat while Standard and Poor’s has a Stable Outlook on Fiat. S&P said its ratings and outlook on Chrysler Group LLC (B+/Positive/–) were not immediately affected by the company’s proposed IPO.
A Financial and Strategic SWOT Analysis Review on Fiat is available from GlobalData.
In Morningstar’s view the market has substantially discounted the intrinsic value of Fiat.
“Even assuming there is little change in the combined entity’s market share, we believe that there is still substantial operating leverage to be derived from the Fiat and Chrysler combination, as the two automakers have limited geographic overlap. In addition, the two companies have yet to fully integrate purchasing, development, component sharing, platform sharing, and production capacity.” – Morningstar.