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DCR Upgrades Chrysler To 'A'

2 July 1997

DCR Upgrades Chrysler To 'A'

    CHICAGO, July 2 -- Duff & Phelps Credit Rating Co. (DCR) has
raised the long-term debt ratings of Chrysler Corporation to 'A' (Single-A)
from 'A-' (Single-A-Minus), and Chrysler's preferred stock has been raised to
'A-' (Single-A-Minus) from 'BBB+' (Triple-B-Plus).  Chrysler and its financing
subsidiary, Chrysler Financial Corp., had a total of $16 billion of debt
outstanding on March 31, including approximately $3 billion of commercial
paper.
    This upgrade is due mainly to increased confidence in Chrysler's ability
to maintain its competitiveness, even in a potential economic recession.
Major keys include Chrysler's fine overall cost structure and its good design
execution and product development nimbleness, which will enable it to respond
quickly to changes in consumer tastes and market conditions.
    The upgrade considers the intensely competitive environment of the
domestic auto industry, which may be further amplified by any major economic
recession.  In particular, DCR continues to believe that competitive entries
will apply further secular pressure on the attractive profit margins in
Chrysler's important minivan and sport-utility vehicle segments, and that
automakers will need to continue relatively high levels of new product
investment to maintain their competitive position through any recession.
    Chrysler's $7.5 billion cash target provides good downturn protection, as
it should amply cover the cash flow shortfall resulting from potential market
volume drops and pricing incentive increases to levels comparable to previous
cyclical troughs, as well as any minor share erosion.  However, the expected
secular margin pressure will make continued cost leanness important to
enabling Chrysler to continue aggressive new product spending without adding
significant debt.  Positively, Chrysler's good supplier relations and the
general enthusiasm of suppliers for its SCORE cost reduction program should
boost its cost containment efforts.
    While Chrysler comparatively lacks geographic diversification (only
7 percent of its sales are outside North America), it has good opportunities
for profitable growth internationally.   Longer term, its international
operations are expected to provide a more meaningful profit contribution and
buffer to future North American cycles.  To note, some of the true profit
contribution of current international volume is likely included in its North
American accounting results, since Chrysler exports more than $2 billion of
its $4 billion in international sales.  However, international growth can also
increase risk, especially near term, as current significant investments in
building new Latin American plants and in acquiring European distributors are
increasing Chrysler's cost base.
    Despite a slowing domestic market, Chrysler's operating cash flow should
easily remain strong enough near term to fund planned capital expenditures and
dividends, although Chrysler will need to curtail its heavy stock repurchases
if market softness persists.

SOURCE  Duff & Phelps Credit Rating Co.