October 30, 2017 / 3:35 PM / a year ago

Fitch Assigns Senior Unsecured Rating to CNH Industrial N.V. of 'BBB-'

(The following statement was released by the rating agency) BARCELONA/LONDON, October 30 (Fitch) Fitch Ratings has assigned CNH Industrial N.V. (CNHI) a senior unsecured rating of 'BBB-'. Fitch has also rated the Euro medium-term note (EMTN) programme for CNH Industrial Finance Europe S.A. and USD600 million bond issued by CNHI at 'BBB-'. The dollar bond is listed on the New York Stock Exchange and the EMTN programme on the Irish Stock Exchange. The EUR10 billion programme only benefits from the guarantees from CNHI. Operating subsidiaries do not guarantee either the EMTN programme nor the USD600 million bond issued at the CNHI level. Both the notes programme and the issue are senior unsecured, with no major covenants other than cross-default and ownership clauses. Noting CNHI's full control over its subsidiaries' cash flows, Fitch believes there is no structural subordination KEY RATING DRIVERS Diversified Business Profile: CNH is one of the largest and most diversified capital goods original equipment manufacturers (OEMs) globally, with a strong market share in nearly every region it serves. CNHI is the leader in Europe and is among the three largest players in North America and Latin America for agricultural equipment. In commercial vehicles, which are primarily sold in EMEA, CNH maintains a top-three position for light and medium commercial trucks. The company's largest geographic market is EMEA, which represented 56% of 2016 sales, followed by North America (21%). Deleveraging Trend: CNHI's funds from operations (FFO) adjusted net leverage declined to 2.8x at end-2016 from above 5x at end-2014, driven by management's focus on deleveraging. CNHI has demonstrated a track record of deleveraging, despite significant stress in the agriculture and construction equipment markets. Fitch forecasts FFO net leverage to decrease below 2.5x in the short term, driven by stable profitability and continued positive FCF generation. Capex Constrains FCF Generation: Fitch forecasts lower free cash flow (FCF) margins at around 1.5% in its four-year forecast period, on expectations for increased regulatory spending. Fitch forecasts working capital will increase with gradual volume growth, and expects capex to be higher than in the past three years, driven by Stage V emission standards investment needs. CNHI's FCF margin improvement in 2015 and 2016 to 4% was driven by better working-capital management and lower regulatory capex. However, Fitch believes that lower working-capital needs are not necessarily a structural improvement, but a result of stressed market conditions leading to inventory adjustments, which could reverse in the short to medium term. Profitability Lags Peers': CNHI's profitability is lower than higher-rated peers', because of a higher cost base, smaller scale and different product mix. Fitch forecasts an improvement in EBIT margins to around 4%-4.5% in the medium term from 2.6% in 2016, as we expect continued weak pricing conditions in the construction and commercial segments to be offset by the successful implementation of CNHI's cost savings programme. End-markets Still Depressed: Fitch does not expect a sharp recovery in agriculture and construction equipment markets despite signs of bottoming out with orders from Latin America and North America slightly picking up. Fitch believes that farm income in the US and EMEA is at historical lows and limited credit availability in Latin America could further constrain demand, which drives our low single-digit growth assumptions for the next four years. Consolidation in agricultural markets may limit large capex by buyers and therefore delay sizeable orders, although this will be offset by more light machinery orders. Cash Allocation Strategy: Fitch believes that CNHI has limited headroom for M&A and shareholder-friendly policies compared with its peers, and will continue channelling available cash for debt repayment and capex. Fitch expects that a material increase in cash outflows to shareholders could tighten leverage metrics and limit further acquisitions that could improve CNHI's market shares. Any change in CNHI management's cash allocation strategy to make higher dividend payments or undertake large M&A, leading to significant increase in leverage metrics, could lead to a significant deterioration in credit quality. Regulatory Risks: Similar to the auto industry, trucks and agricultural equipment manufacturers are prone to political and policy risks. The management of global emissions legislation remains an important issue for the industry as a whole. Fitch incorporates increased capex related to emission standards in its projections for CNHI, and believes that potential moderate fines and penalties will be manageable within the current rating. DERIVATION SUMMARY Fitch views CNHI's business profile as being in line with investment-grade peers, both in terms of geographic and end-market diversification. CNHI's business profile is characterised by market-leading positions in most of the company's products, a diverse product range, a broad end-customer base and a good geographical breakdown of activities. CNHI's profitability lags higher-rated peers' all across segments, due to a higher cost base, smaller scale, lower market shares and a different product mix. We believe CNHI's financial profile does not match higher-rated peers such as Deere & Company and Caterpillar Inc., which are around the 'A' rating median, but that it remains commensurate with a 'BBB' rating category in our rated capital goods universe. Despite recent deleveraging, CNHI's leverage metrics are higher than those of AB Volvo (BBB/Stable) and Deere and Company (A/Stable), with limited flexibility. However, FFO net leverage is expected to remain commensurate with the 'BBB' category (around 2.5x) through our four-year forecast period, driven by our expectations of FCF generation increase of 1%-2%. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - modest revenue growth of 2% per year; - EBITDA margin growing to 9.5% by 2020 from 9.1% in 2016; - dividend payout at 50% of net income; - capex at 3% of revenue (2.1% at end-2016); and - slight working-capital outflow at an average of USD127 million per year over 2017-2020. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -FFO adjusted net leverage below 2x -EBIT margins over 7% -FCF margin above 2% through the cycle -Stable market shares, combined with a sufficient track record or confidence that the company can meet the quantitative guidelines above Future Developments That May, Individually or Collectively, Lead to Negative Rating Action CNH Industrial -Negative FCF margins through the cycle -FFO adjusted net leverage above 3x -EBIT margin below 4% -Increased funding needs for CNHI Capital, leading to a significant stress in leverage metrics LIQUIDITY Healthy Liquidity: Fitch views the liquidity position of CNHI as healthy. At end-2016, the company had unrestricted cash of USD3.9 billion and undrawn committed credit facilities of USD2.9 billion, more than covering its short-term debt of USD1.3 billion. The main funding source of CNHI is its EUR10 billion medium-term note programme, which the company taps into regularly. This also provides the company with an even maturity schedule with annual maturity of less than USD2 billion, Contact: Principal Analyst Alexey Evstratenkov Associate Director +44 203 530 1089 Supervisory Analyst Cigdem Cerit Associate Director +34 93 467 8840 Fitch Ratings Espana Av. Diagonal, 601, planta 2 08028 Barcelona Committee Chairperson Emmanuel Bulle Senior Director +34 93 323 8411 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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