Fitch Ratings has upgraded CNH Industrial N.V.'s (CNHI) Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'BBB-'.
The Outlook is Stable. Fitch has also upgraded CNH Industrial Finance Europe S.A.'s senior unsecured rating to 'BBB+' from 'BBB-'.
The upgrade follows the successful spin off of CNHI's truck business. Following the demerger of the business, Fitch expects CNHI's business profile to be supported by the less cyclical nature of the remaining agriculture business broadly in line with the 'BBB' rating category. Service revenues of around 20% will provide stable cash flows. The loss of diversification will be mitigated by higher profitability and operational cash generation that is in line with 'BBB' rating medians in our Rating Navigator.
Fitch expects CNHI's capital structure to be in line with a high 'BBB' rating. We forecast that CNHI will maintain funds from operations (FFO) net leverage metrics of around 1.5x in its four-year forecast, which is in line with a 'A' rating in our Navigator.
Key Rating Drivers
Reduced End Market Diversification: CNHI will retain just over 50% of total revenue and 66% of EBIT on a consolidated basis post the IVECO spin-off. The business profile of the remaining company is likely to weaken due to reduced end-market diversification and a narrower product range. Fitch believes this is mitigated by the issuer's increased exposure to the agriculture market (82% of revenues), which is less cyclical than the trucks business, improving business stability.
Strong Business Profile: We deem current end market diversification weak compared with higher rated diversified industrial peers in our navigator which have exposure to a number of end markets like Caterpillar, Siemens, PACCAR. However, CNHI's overall business profile remains commensurate with the 'BBB' rating category, backed by good geographic diversification, strong market shares in agriculture business and exposure to a less cyclical end-market. CNHI is one of the largest and most diversified capital goods original equipment manufacturers globally, with strong market shares in most regions. CNHI is the leader in Europe and among the three largest players in North America and Latin America for agricultural equipment.
Profitability to Improve: We expect CNHI to have higher margins, generally in line with those of agricultural equipment manufacturers, as the commercial trucks segment, which demerging as Iveco Trucks, is a low-margin business. Fitch forecasts that CNHI will maintain EBIT margins around 8% through the forecast period. This is despite our assumptions of persistent raw material price pressure until 2023. This is slightly lower than CNHI's main peer Deere's profitability, driven by a different product mix and cost base, but is commensurate with the 'BBB' rating category.
Fitch believes that the current peak in agriculture markets in a number of geographies, including the US, increases manufacturers' ability to push price increases to customers. This is supported by the benign construction outlook and provides a buffer against substantial raw material and logistic price increases. We expect current positive trends to subside in 18-24 months, and maintain more conservative forecasts compared with management's case.
Strong Capital Structure: Fitch expects CNHI's gross leverage metrics to remain in line with the 'BBB' rating median (3.5x) in our navigator. This is despite increased investment spending and our more conservative financing cost assumptions. However, we expect FFO net leverage to be in line with the 'A' rating median (1.5x) through the forecast period, reflecting management's conservative cash allocation policies. Compared with higher rated peers such as Deere and Caterpillar, CNHI's leverage metrics remain elevated.
Prudent Capital Allocation Policies: The rating reflects our assumption that CNHI will maintain a conservative capital allocation policy, mirroring its historical record. Our forecast dividend payments reflect management's assumptions, and there are no sizeable acquisitions for the next four years. A deviation from these policies, driving an increase in net leverage metrics could have a negative rating impact.
Healthy FCF Generation: Free cash flow (FCF) generation has historically been more volatile than higher rated peers, partially because of the spin-off and the inventory reductions during the pandemic. CNHI expects to increase capex and fund these investments through internal cash generation. Despite this, and our more conservative profitability assumptions, Fitch forecasts FCF generation to remain around 2.5% over the forecast period, which is commensurate with the 'BBB' rating median.
Profitability Lags Peers: CNHI's profitability is lower than higher-rated peers such as Deere and Caterpillar, because of a higher cost base, smaller scale and different product mix. CNHI remains the market leader in crop collection, but it has lagging markets shares in tractors and construction equipment. Fitch believes this increases the risk of additional investment needs, and has a negative impact on CNHI's pricing power compared with 'A' rated peers. The issuer's investments in precision AG is likely to expand the profitability margin, but this is not embedded in our four-year forecast.
Regulatory Risks: Similar to the auto industry, agricultural equipment manufacturers are prone to political and policy risks. Fitch views CNHI's exposure as relatively unchanged as a result of the Iveco spinoff. The management of global emissions legislation remains an important issue for the industry. Fitch incorporates increased capex related to emission standards in its projections for CNHI, and believes that potential moderate fines and penalties will be manageable at the current rating.
Adjustment for Financial Services: Fitch rates CNHI on an industrial-only basis and adjusts its consolidated debt to account for its financial services business. In line with Fitch's criteria, the debt-to-equity ratio at the financial services business is assigned at 5x, which is equivalent to an equity injection into the financial services business of EUR1.1 billion, with a corresponding debt transfer to the industrial operations of the group.
Following the truck spin-off, CNHI's end-market diversification will be limited compared with 'A' rated peers that have exposure to a number of end markets, such as Siemens and ABB. However, this weakness is mitigated by CNHI's business stability. reflected by the increased exposure to the agriculture market. Fitch views CNHI's business profile as in line with the 'BBB' rating category, which is characterised by market-leading positions in agriculture and construction equipment, a broad end-customer base and diversified geographical breakdown of activities
With EBIT margins around 8%, profitability lags higher-rated peers across all segments, due to a higher cost base, smaller scale, lower market shares and a different product mix. We believe CNHI's financial profile lags that of higher-rated peers, such as Deere & Company (A/Stable) and Caterpillar Inc. (A/Stable), which are around the 'A' rating median but remains commensurate with the 'BBB' rating category in our rated capital goods universe.
CNHI's FFO gross leverage is also high compared with higher-rated peers, but is in line with the 'BBB' rating category. We view FFO net leverage metrics as in line with a 'A' rating median and close to 'A' rated issuers in our diversified industrial portfolio.
Agriculture peak to support strong growth and profitability pick up in 2021 and 2022. A more conservative single digit revenue increase beyond 2022 as we lose order book visibility.
Raw material price impact is already partially embedded in 2021-2022 margins - cost of goods maintained around same levels within our rating horizon.
Capex at around 3% of revenues through rating horizon.
No sizeable M&A in forecasts.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
FFO margin above 10% on a sustained basis
Stable FCF generation above 4% on a sustained basis
Net cash position on a sustained basis
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FFO net leverage above 1.5x on a sustained basis
FFO margin below 8% on a sustained basis
FCF generation below 2.5% on a sustained basis
Increased funding needs for CNHI Capital, leading to significant stress on leverage metrics
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Strong Liquidity: Fitch deems CNHI's liquidity strong, mirroring its higher rated peers and investment grade EMEA diversified industrials, sufficiently covering its 24-month maturities. Liquidity is backed by a USD4,800 million available credit facility, which we assume to be undrawn over the rating horizon. In addition, CNHI is expected to generate FCF margin of around 2.5% over the next four years, providing a comfortable cash buffer against sudden market backdrop.
CNHI is a global capital goods company that designs, manufactures, markets, and finances agricultural and construction equipment. Agricultural equipment is sold under the New Holland Agricultural, Case IH Agricultural, Steyr, and Miller brands. Construction equipment is sold under the New Holland Construction and Case Construction brands.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Entity / Debt
CNH Industrial Finance Europe S.A.
CNH Industrial N.V.
VIEW ADDITIONAL RATING DETAILS
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