Fitch Downgrades Chrysler
Rating agency offers negative outlook on automaker.
May 7, 2008
US automaker Chrysler was downgraded by Fitch Ratings on Wednesday, the second Cerberus Capital Management portfolio company to be downgraded in a week.
On May 2, Standard & Poor's lowered selected ratings of GMAC's Residential Capital LLC, including the long-term corporate credit rating, and warned that ResCap may file for bankruptcy if the company's exchange offer for unsecured bonds fails.
On Wednesday Fitch downgraded the issuer default rating of Chrysler to 'B' from 'B+', with a negative rating outlook. Fitch also downgraded the senior secured bank facilities as listed below, based on the downgrade of the issuer default rating and Fitch's recovery rating methodology.
"The downgrade reflects the decline in unit volumes and revenues resulting from weak economic conditions, modest share losses, certain strategic initiatives, and the effect of these factors on the company's operating performance," according to Fitch. "Chrysler's restructuring efforts remain on track, and liquidity is expected to remain adequate over the near term to fund restructuring costs and operating losses through a period of economic weakness."
Fitch noted that since 2000, Chrysler's market share losses have been more moderate than at Ford and GM, requiring fewer reductions in assembly capacity and the associated fixed costs.
"In a stable revenue environment, this would allow cost reductions to flow more quickly to the bottom line. However, the severe impact of weakening economic conditions has made this more challenging, and has extended the timline projected for a potential reversion to positive cashflow," the rating agency said, adding that the "steep decline in 2008 unit sales also results from strategic initiatives undertaken at Chrysler following its management changes, including reduced fleet sales, product eliminations and inventory reductions, steps that are viewed positively for the company's long-term prospects."
Fitch warned that demand for Chrysler's pickups could be hurt by a drop in resdential construction in addition to high gas prices, and the impact of general economic conditions on industry sales. Chrysler's efforts to sharply curtail fleet sales and to convert its sales/production strategy to a 'demand-pull' model from a 'production-push' model will further affect sales declines in 2008. International sales, representing approximately 10% of production, are likely to continue to grow at double-digit rates, providing modest support to consolidated sales and capacity utilization, according to Fitch.
Fitch said Chrysler's cash flow will remain negative in 2008, due to operating losses, restructuring costs and other one-time items. The company is realizing substantial reductions to its fixed-cost structure, the bulk of which have resulted from salaried and hourly headcount reductions. Variable purchasing, material and other efficiencies have been more difficult to realize as rising commodity costs have offset other progress. Cost reductions and the new UAW contract have positioned the company to moderate operating losses during the current economic weakness, but a return to positive free cash flow is likely to require an upturn in the construction market and Chrysler's pickup sales. Chrysler also faces pending CAW contract negotiations.
"Liquidity levels are expected to be sufficient to weather weak economic conditions and finance operating and restructuring costs over the near term," the rating agency said.
New management has resulted in a number of strategic and product adjustments that are quickly being brought to market, according to the rating agency. Fitch expects that Chrysler will continue to employ an 'asset-lite' approach that could involve additional assembly plant shutdowns. Alliances and/or contract manufacturing will play a role in this decision, and Chrysler is expected to continue to pursue such arrangements on a global basis. Tie-ins with other global OEMs are expected to focus on growth in the company's brand, engineering and distribution capabilities, but requiring minimal capital investment. The relationship with Daimler, which owns 19.9% of Chrysler, remains a modest positive to the rating because of Chrysler's access to certain Daimler technology, according to Fitch.
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