Fitch Places Chrysler LLC 'CCC' Rating on Watch Negative
Last update: 12:28 p.m. EST Nov. 19, 2008
CHICAGO, Nov 19, 2008 (BUSINESS WIRE) -- Fitch Ratings has placed the 'CCC' Issuer Default Rating (IDR) of Chrysler LLC on Rating Watch Negative, reflecting the company's diminishing liquidity position and the pressing need for external capital to weather current market conditions. The impact of a steep cyclical decline in industry sales, plus the impact of the credit crisis on the availability of retail financing, will result in further revenue declines over the near term, offsetting the company's material improvement in its cost structure. Operating losses, restructuring costs and working capital outflows will continue to result in heavy cash drains over the next several quarters.
Fitch expects that federal financial assistance over the next quarter and the forbearance of trade creditors will be required in order to avoid a default.
With virtually no further access to external capital and little potential for material asset sales, cash holdings are expected to shortly reach minimum required operating levels. Chrysler is dependent on the financial capacity and willingness of its suppliers to continue extending trade credit, as the company does not have sufficient resources to finance ongoing operations in the event that trade credit is curtailed. Fitch expects that federal aid to Chrysler is probable, either directly or through facilitating a merger, although the amount, timing, structure and term remain uncertain.
Without material federal assistance in the short term, Fitch would review the rating for a potential downgrade to 'CC', which indicates that default is probable.
The provision of federal assistance may not preclude a downgrade to 'CC'.
Over the near term, capital constraints will continue to restrict Chrysler's ability to invest in the technology, product and plant necessary to remain competitive in the North American market. Expansion of global alliances or an acquisition by a competitor will be required to give Chrysler the capital and scale to remain viable given the competitive market, the cyclical nature of the business and the rapid technological change forecast for the industry over the near term. Chrysler's strengths in minivans, pickups and the Jeep brand provide a viable platform for sustaining production in these segments if Chrysler is able to ally itself with a stronger global manufacturer. The rapid deterioration of the North American market over the past year has outpaced Chrysler's ability to transition its market and product strategy, leaving the company in an untenable capital and competitive position given the projected industry environment over the next two years. The rationing of retail financing in the domestic market further highlights the superior capital advantage held by transplant manufacturers, which will further impair near-term volume and price performance of the domestic manufacturers.
Fitch has also downgraded the senior secured first-lien bank loan to 'CCC+/RR3', based on weaker recoveries in the event of a bankruptcy. Recoveries are based on a liquidation scenario rather than a going-concern basis, with minimal recovery on PP&E, limited recoveries on inventories and receivables, plus residual value for the minivan and Dodge Ram platforms and the Jeep and Dodge brands.
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