Merrill credit analyst remains negative on Fiat despite new CEO, sales

By Ronda Fears

Nashville, March 3 - Despite Fiat SpA's asset sales, a new chief executive and no surprise in its earnings, Merrill Lynch & Co. credit analyst Simon Atkinson still recommends underweighting the paper.

On Friday, Fiat reported its 2002 results, affirmed the board had appointed a new chairman and a new CEO, confirmed it was selling Toro and Avio and said it planned a €5 billion recapitalization of Fiat Auto Holdings BV.

The main story focused on whether GM would be increasing its shareholding in Fiat Auto, now or in the future.

The earnings were viewed as neutral to the credit but the asset sales were a hit because of the loss of cash flow, Atkinson said in a report Monday. The Toro and Avio sales have the most credit impact, as he would view the sale of Fiat Auto as a positive event.

"We expected newsflow on the GM-Fiat Auto situation to be center stage this year and we are not disappointed. We continue to monitor the situation but reiterate our belief that there is more risk attached to the Fiat group owning rather than selling Fiat Auto," Atkinson said in the report.

"That said, later rather than sooner, may be a better time for GM to take the reins. If so, we would view a deferment of the put date rather than a cancellation to be a case of 'better late than never' for Fiat bondholders.

"We remain underweight the bonds."

Ahead of the full details, he said Merrill initially regard Fiat's fiscal 2002 results - broadly in line with expectations - as neutral against the credit view.

"While Fiat may have saddened on the bottom line of the income statement, cash flow generation and debt reduction were ahead of what we had thought, primarily through better working capital management," Atkinson said.

"To offset this good work, the cash payments of €700 million relating to the 2002 restructuring will be a much higher drain on cash flow this year and next than we had expected."

Fiat emphasized that there was a deepening industrial relationship with GM but no announcement about the put option or that GM was going to subscribe for new equity. However, Atkinson said it appears that Fiat is leaving the door open for alternatives beyond the put.

Management announced a capital increase of up to €5 billion in Fiat Auto Holdings BV, the entity in which GM holds 20% currently, not the listed parent of the Fiat group.

Fiat SpA plans to put in €3 billion immediately through swapping an intra-group loan into some form of equity and the balance of up to €2 billion could take place over the next 18 months.

In addition to the capital increase, Fiat said that it expects to conclude on the sale of both Toro and Avio in the first half of 2003. According, Atkinson said that given these are two major free cash flow generators for the group, Merrill changed its credit view on Fiat to the mid-to-low BB area.

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