(The following statement was released by the rating agency) BARCELONA/LONDON, January 02 (Fitch) Fitch Ratings says that the agreement reached by Fiat Spa (BB-/Negative) with VEBA Trust for the acquisition of its remaining equity interests in Chrysler Group LLC (Chrysler) has no immediate impact on Fiat's rating, with a relatively modest increase in Fiat Group's consolidated balance sheet.
However, ring-fencing of Chrysler's debt remains an issue as it continues to limit Fiat's access to Chrysler's cash. Payment coming directly from Fiat is limited to USD1.75bn, which is positive as it limits the weight of the acquisition on Fiat's already stretched standalone financial profile.
Moreover, gross leverage will remain unaffected as Fiat has a sufficient cash buffer (beyond what is normally expected in the industry) to pay for the acquisition without increasing its gross debt. Fitch expects to review Fiat's rating in early 2014 based on the full year 2013 results and our updated expectations for performance in 2014.
Fiat's rating is predicated on the group's funds from operations (including Chrysler) increasing to EUR7bn or more in 2014 and Fitch's assumption that Fiat will be able to refinance Chrysler's debt without restriction by 2016. Under the agreement announced on 1 January 2014, the VEBA Trust will receive a cash consideration of USD3.65bn for its 41.4616% equity interests in Chrysler. USD1.9bn will be paid by Chrysler and USD1.75bn (approximately EUR1.3bn) by Fiat.
The VEBA Trust will also receive a contribution of an aggregate USD700m in four USD175m yearly instalments from Chrysler. The first USD175m payment will be due at closing, which limits immediate cash outflow. The transaction is expected to close by 20 January. Fitch previously assessed that a cash consideration of around USD3bn would be a favourable scenario for Fiat as the impact on the group leverage (including Chrysler) would be relatively modest at about 0.3x FFO (see "Fiat's Proposed Purchase of Chrysler: Scenario Analysis Highlights Risks for Financial Profile" dated October 2013 at www.fitchratings.com).
An increase of its stake to 100% of Chrysler would not necessarily give Fiat immediate unrestricted access to Chrysler's cash, which is ring-fenced by financial documentation. Under the current loan and bonds documentation, whose covenants have all been aligned, Fiat can only receive dividends up to USD500m plus 50% of cumulative net income from 1 January 2012 but a dividend of USD1.9bn, payable as of the date of closing, will be directed entirely to the VEBA Trust as part of the price consideration for its equity stake.
Full access to Chrysler's cash would require the refinancing of Chrysler's credit agreement and bonds maturing in 2019 and 2021 with unrestricted conditions. Refinancing of the two bonds is unlikely to take place before 2015 and 2016, respectively, as the bonds' make-whole clause would make a buy-back expensive for the group.
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