(The following statement was released by the rating agency) PARIS/LONDON, October 30 (Fitch) Fitch Ratings says that Fiat Chrysler Automobiles N.V.'s (FCA) planned offering of common shares and mandatory convertible securities and its decision to spin off Ferrari SpA are a positive development for its credit profile. However, the ratings remain constrained by our expectations of negative free cash flow through 2016. FCA's Long-term Issuer Default Rating (IDR) and senior unsecured rating are 'BB-' and its Short-term IDR is 'B'. The Outlook is Stable. Fitch views positively the expected cash inflow from the sale of common shares for a net amount of approximately EUR0.4bn, the issue of mandatory convertible securities for USD2.5bn and the spin-off of its 90% subsidiary Ferrari for an amount yet to be determined by market valuations. FCA will make a public offering of its interest in Ferrari equal to 10% of Ferrari's outstanding shares and distribute its remaining shares to FCA's shareholders. Concurrently, FCA also expects to receive a dividend from Ferrari. In addition, in line with our previous assumption highlighted in our Rating Action Commentary dated 11 September 2014, FCA confirmed its intention to refinance Chrysler's senior secured notes due 2019 and 2021 at their initial optional redemption dates of June 2015 and June 2016, respectively. The refinancing will significantly reduce net interest expenses and offset the earnings loss from the Ferrari deconsolidation. Overall, FCA expects an aggregate net cash inflow of about EUR4bn from these transactions. The cash inflow will lower FCA's net financial debt and strengthen its key credit metrics. In particular, we expect these transactions to have a combined 0.4x-0.5x positive effect on funds from operations (FFO) adjusted net leverage. Furthermore, the planned refinancing of Chrysler's notes will eliminate, in 2016, the current restrictions on the movement of cash within the group and reinforces our view to assess FCA on a consolidated basis. However, the ratings also reflect weak free cash flow generation, which we project to remain negative at least through 2016, and which is not directly addressed by these transactions. In addition, several terms of the mandatory convertible securities will be decided once the issue is priced and may lead Fitch to treat these notes as debt until conversion rather than giving them 100% equity credit as from the time of issue. In particular, according to Fitch's methodology, the impossibility to defer interests for the remaining life of the instrument or the settlement of deferred interests in cash would lead to no equity credit. KEY RATING DRIVERS Consolidated Profile Fitch revised FCA's Outlook to Stable from Negative in September 2014 as we believe that FCA's ratings should reflect the group's consolidated credit profile in the 'BB' rating category rather than FCA's metrics excluding Chrysler, which are more indicative of the 'B' category. In addition, the group's business profile has strengthened, due to the increased integration of Chrysler into FCA. We expect integration to deepen further and to provide more synergies in the medium term. Ambitious Business Plan Fiat's five-year business plan presented in May 2014 targets a 52% sales increase by 2018, notably by expanding its geographical commercial footprint, reshuffling its product portfolio and via a refocused effort on its premium brands. Fiat expects to produce the models for its premium brands in its under-utilised factories in Italy, to avoid plant closure and to cut losses. Fiat expects to increase EBIT margin to between 6.6%-7.4% in 2018, from 4.1% in 2013 and less than the 4% expected by Fitch in 2014. This plan makes strategic sense but will be costly as it entails an acceleration of capex and R&D and carries substantial execution risk. Some of the group's brands are still perceived quite poorly and it can take time to increase sales sufficiently to maintain existing capacity in Europe. However, increasing sales at Maserati and Jeep are positive signals. Pressure on Earnings We expect further losses in Europe in 2014 and 2015 and a sharply declining contribution from the usually very profitable Latin American market. This should be mitigated by Chrysler's solid performance and by that of other divisions too, including its luxury brands. However, from a cash-flow perspective, improving FFO will be absorbed by rising investment to make up for the cuts made in past years. We project FCF to remain negative through at least 2016. Healthy Liquidity Fiat ex-Chrysler reported EUR7.3bn in cash and equivalents at end-1H14, excluding Fitch's EUR1.4bn adjustments for minimum operational cash and EUR2.1bn of undrawn credit lines. This largely covers EUR5bn of debt maturing in 2014 and negative FCF. Chrysler also reported EUR8.3bn in cash and marketable securities, adjusted for operational needs, and EUR1bn of undrawn credit lines, comfortably covering EUR0.1bn of debt maturing in 2014. RATING SENSITIVITIES Positive: Future developments that could lead to positive rating actions include: -Positive FCF and higher margins at Fiat auto mass market, on a sustained basis -Full access to Chrysler's cash, without weakening the group's capital structure in parallel Negative: Future developments that could lead to negative rating actions include: -Falling revenue and operating margins, including group EBIT margin below 2%, mounting liquidity issues, including refinancing risks, consolidated FFO-net adjusted leverage above 2.5x (2013: 1.8x, 2014E: 2.4x) and no sign of FCF turning positive by end-2016 -Evidence of significant financial support to Chrysler to the detriment of existing Fiat bondholders Contact: Thomas Corcoran Associate Director +44 20 3530 1231 Emmanuel Bulle Senior Director +34 93 323 8411 Fitch Ratings Espana S.A.U. 85 Paseo de Gracia 08008 Barcelona Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: [email protected]. 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