Tuesday, March 31, 2009

Detroit's Tentacles Cross Atlantic: Fiat Junked

Not sure if this fall angel downgrade of Fiat SpA is due to the "Chrysler connection" (which alone would be worthy of a C- rating), or just because S&P realized there are other auto companies out there that deserve a careful scrutiny, but either way, here it is.

Carmaker Fiat SpA Becomes A Fallen Angel On Downgrade To 'BB+/B' Re Weak Liquidity; Long-Term Rating Still On Watch Neg

Among other parts of the S&P report:
The downgrade reflects our opinion of Fiat's weak liquidity position considering 2009 and 2010 debt maturities. According to reported data as of Dec. 31, 2008, Fiat did not have enough available financial resources in the form of bank lines and existing cash to fully cover its financial maturities in the subsequent 12 months, barring the repayment by subsidiary CNH Global N.V.(BB+/Watch Neg/--) of some intercompany loans. We note the deterioration of global demand in the auto and truck sectors, as well as difficult capital-market conditions worldwide. This lower demand could, in our view, negatively affect Fiat's operating performance and increase the risk of it having to burn cash again in 2009.

Short-term credit factors

The short-term rating is 'B'. We see Fiat's current liquidity situation as weak. As of Dec. 31, 2008, Fiat had €3.9 billion in cash and marketable securities and €2.0 billion in committed lines, most of them maturing in 2010. These lines were fully drawn at year-end. At end-December 2008, Fiat indicated that it had €4.8 billion in maturities coming due over the subsequent 12 months. The large 2008 cash burn in Fiat's industrial activity and the need to support CNH's finance operation in North America have dented the group's financial position.

Earlier this year, Fiat signed €1 billion in new, committed credit lines, but we expect additional liquidity to have been needed in the first quarter, which is usually negative in terms of cash generation.

If successful, the sale of a portion of CNH Capital's U.S. financial receivables under the TALF program will, in our view, likely reduce the risk that Fiat could be called on again to support CNH's financial services activities, as occurred in 2008. We believe that this could also free up some resources that CNH Capital could return to the industrial companies to improve the Fiat group's liquidity profile. However, this may not be sufficient to bring significant relief, especially if there is new industrial cash burn.

Recovery analysis

The senior unsecured debt issues of Fiat Finance & Trade Ltd. and Fiat Finance North America Inc. are rated 'BB+', the same as the corporate credit rating on 100% parent, Fiat SpA. The debt has a recovery rating of '3', indicating Standard & Poor's expectation of meaningful (50%-70%) recovery in the event of a payment default.

We have valued the business as a going concern. Given Fiat's good market positions and well-recognized brands--for which there is significant customer demand and a widespread distribution network--we assume that a default would most likely result from operational underperformance, as well as a weakening of both liquidity reserves and operating cash flow generation capability. Our hypothetical default scenario assumes that Fiat would voluntarily file for bankruptcy if it foresaw cash balances dropping below a minimum threshold. We have valued the group at €9 billion-€10 billion at the hypothetical point of default.

Recovery prospects for unsecured noteholders reflect both the estimated value available and accessible to the creditors and the likelihood of insolvency proceedings being adversely influenced by Fiat's domicile in Italy.

Recovery prospects are underpinned by Fiat's extensive asset base. For a complete recovery analysis, please see our report "Fiat SpA's Recovery Rating Profile" to published in the coming days on RatingsDirect.

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