S&P Affirms Fiat Group's 'A-2' Rtgs

15 March 2000

S&P Affirms Fiat Group's 'A-2' Rtgs

    NEW YORK--Standard & Poors--March 15, 2000-- Standard & Poor's today affirmed its 'A-2' short-term ratings on Fiat SpA (Fiat) and related entities following the recent announcement of a US$2.4 billion cross- shareholding alliance between General Motors Corp. (GM; single-'A'/Stable/'A-1') and Fiat SpA's passenger vehicle subsidiary, Fiat Auto SpA (Fiat Auto). Following the completion of this transaction, Fiat SpA will own 80% of Fiat Auto and 5.1% of GM. (See list below for all ratings affected.)
    The alliance targets an improvement in the weak cost structure of the group's auto division in the medium term through cooperation between Fiat Auto and GM's operations in Europe and South America. In light of Fiat Auto's poor operating and financial performance in recent years, however--notwithstanding extensive cost-cutting and product renewal efforts--as well as significant challenges still to be overcome in its other core businesses, Standard & Poor's believes that the transaction is essentially neutral at the 'A-2' level for Fiat SpA. Nevertheless, given Fiat Auto's limitations as a competitor in the rapidly consolidating global automotive industry, Fiat's ultimate exit from the passenger vehicle business could well benefit its business profile.
    The rating on Fiat reflects the number-six position of Fiat Auto (the group's core automotive business) in the world car market and the positive contributions from the group's various diversified activities, which generate more than half of consolidated sales.
    By far Italy's leading automaker, Fiat Auto has been suffering since mid-1998 from an aging product range and from a stronger reliance than its peers on the relatively low-margin super-mini and small-car segments. Moreover, with one-third of Fiat's automotive sales and production generated outside Western Europe, mainly in emerging markets (notably Brazil), Fiat Auto has been further affected by the economic turmoil in these regions. Uncertainties also persist regarding the extent of the potential benefits for Fiat and New Holland of the recent Case Corp. transaction, particularly since the acquisition has come at an unfavorable time in the agricultural equipment cycle.
    In 1999, the group experienced a further weakening in profitability, with the return on sales down to 1.9%, from 2.2% in 1998. This deterioration is attributable to Fiat Auto's and Case-New Holland's significant decline in profitability and to higher interest expenses arising from the robust external growth of 1999. Overall, Fiat will face considerable challenges in the future to achieve overall adequate profitability measures, given the difficult market conditions experienced by Fiat Auto in Brazil and Italy.
    In 1999, the group invested about euro (Eur) 6 billion, with the main acquisition being that of Case Corp. As a result of this intensive external growth, leverage showed significant deterioration at year-end, with the net debt position reaching Eur4 billion and funds from operations down to Eur2.8 billion from Eur3.2 billion in 1998. Standard & Poor's anticipates, however, that management will continue to pursue a conservative financial policy and that significant debt reduction will occur in the wake of the Case Corp. acquisition. ---CreditWire


RATINGS AFFIRMED
                                              Rating
Fiat SpA
  Short-term corporate credit rating           A-2

Fiat Finance & Trade Ltd.
  Commercial paper program*                    A-2

Fiat Finance Canada Ltd.
  Commercial paper program*                    A-2

Fiat France S.A.
  Commercial paper program*                    A-2

New Holland Credit Company LLC
  Commercial paper program*                    A-2

*Guaranteed by Fiat SpA.