(The following statement was released by the rating agency)
LONDON, June 26 - Moody's Investors Service lowered its ratings of debt guaranteed by Fiat S.p.A - senior unsecured ratings were reduced to Baa3 from Baa2 and the rating for commercial paper was lowered to Prime-3 from Prime-2. In a related action Moody's confirmed the Ba2 rating of Case Corporation and Case Credit Corporation. The outlook for the Fiat and Case ratings is negative.
Fiat Rating Rationale: The downgrade of the Fiat ratings reflects Moody's expectation that the operating performance of Fiat's automotive business will remain under considerable pressure through 2003. Moreover, Fiat's 86%-owned farm and construction equipment unit, CNH NV, continues to face a severe cyclical downturn, and the company's truck operation, Iveco, will have to contend with softer demand in the European market into 2003. As a result, debt protection measures for Fiat's industrial operations will remain weak. During 2002 the rate of cash-burn (after working capital, capex and dividends) could exceed 1 billion. In the face of this challenging environment, Fiat is implementing a significant debt-reduction program that Moody's believes will provide a critical enhancement to the company's near-term financial flexibility.
The major components of this plan include: 1) the establishment of a 3 billion bank loan that will mandatorially convert into equity in three years; 2) the sale of 51% of Fiat's automotive consumer credit operations and the creation of a joint venture to provide retail auto financing - the resulting reduction in Fiat debt will exceed 8 billion; 3) the monetization of Fiat's investment in Italenergia for net proceeds of about 1.7 billion; 4) an IPO of 35% of Fiat's ownership in Ferrari for approximately 800 million; and, 5) the ongoing effort to dispose of various non-core industrial and financial assets that could yield total proceeds in excess of 1.6 billion through 2003. These initiatives could result in a significant reduction in Fiat's industrial and financial services gross debt that currently stands at about 35 billion. The Italenergia transaction has been completed, and Fiat has received commitments from important relationship banks to proceed with the mandatory convertible and the financial services joint venture transaction.
Fiat's debt reduction initiatives, in combination with its 5.5 billion in cash and securities, 4.5 billion in committed borrowing facilities, and 2.0 billion market value for its 5.8% holding of GM common shares, should afford the company adequate financial flexibility through early 2004. At that point, Fiat will have the option to put the remaining 80% of Fiat Auto to GM. Moody's believes that the exercise of this put option would be a critical feature of Fiat's longer-term operating and financial profile, and would provide significant support for sustaining the Baa3 rating. Putting its automotive operations to GM would eliminate the most significant drag on Fiat's long-term operating performance, cash generation and return measures. It could also result in a material inflow of additional cash, depending on the fair market value of Fiat Auto at the time of an exercise.
The Baa3 rating anticipates that Fiat's debt-reduction initiatives will be completed in a timely manner and that they will be structured in a fashion that is beneficial to creditors. Moody's notes that the structural, legal, and covenant framework established for the mandatory convertible, the automotive finance joint venture, and the Italenergia transactions will be important factors in determining the ultimate degree of benefit that these three initiatives afford to Fiat's financial flexibility. In addition to the benefits associated with the debt reduction program, the rating also anticipates that Fiat will continue to improve the operating efficiencies and return measures of CNH, and preserve the strong competitive positions of its other operating businesses. These businesses include Iveco (medium-duty trucks), Fiat Avio (aerospace componentry), Toro (insurance), and the growing Business Solutions operations Moody's believes that the future exercise by Fiat of the GM put option would enhance the company's credit quality and help solidify its position within the current rating level.
Consequently, the pro forma performance of Fiat's industrial operations excluding Fiat Auto is an important consideration in Moody's assessment of the company's credit quality. This pro forma assessment also takes into consideration the sizable near-term debt repayments that will likely result from the Fiat debt reduction plan. Although this pro forma performance (which excludes Fiat Auto) is much stronger than that of the consolidated industrial operations (which includes Fiat Auto), we believe that the resulting debt protection measures would be only marginally supportive of the Baa3 rating into 2003. However, if Fiat receives a material payment upon an exercise of the GM put, and if it is able to achieve the planned level of improvement in the operating performance of its remaining businesses, the company's credit profile could strengthen in 2004. The ultimate degree of improvement would be driven by the then determined value of Fiat Auto, and by Fiat's use of the proceeds received. As explained below, the company could devote a major portion of any proceeds from the GM put to pre-pay the 3 billion convertible loan.
Fiat Rating Outlook:
Fiat's negative outlook recognizes Moody's expectation that the company's operating performance and debt-protection measures will remain very weak for the current rating level through 2003, despite the significant benefits that will flow from the debt reduction plan, and any pro forma adjustment for an exercise of the GM put. In order to avoid pressure on the rating and limit the risk of a further downgrade, the company must make steady progress in completing the key components of its debt-reduction program, and maintain the recent pace of improvement in the operating performance of CNH. Moody's recognizes that in 2004, Fiat could chose to either exercise the GM put or pursue other alternatives for its car business. If Fiat does not exercise the put, it will be critical for the company to: 1) achieved a significant and sustainable improvement in Fiat Auto's operating performance; 2) materially exceed expectations for implementing all of the components of its debt reduction plan; and 3) successfully pursued an alternative strategy for the merger or sale of its car operations to another manufacturer.