Thursday, July 31, 2008

Fitch cuts rating on credit for Chrysler

Public concern expected to further harm firm's standing


Suppliers and retail customers concerned about Chrysler LLC's financial condition could exacerbate the struggling automaker's situation, Fitch Ratings cautioned Tuesday as it further downgraded its credit rating on the Auburn Hills automaker.

Fitch reiterated that Tuesday, adding: "This could be accelerated in the event that suppliers or retail customers become concerned with Chrysler's financial condition and restrict trade credit or reduce retail purchases."

The rating agency downgraded Chrysler to CCC from B-minus. Fitch has only two rating levels below CCC for high-yield corporate borrowers.

"The downgrade reflects Chrysler's restricted access to economic retail financing for its vehicles, which is expected to result in a further step-down in retail volumes," a Fitch note said. "Lack of competitive financing is also expected to result in more costly subvention payments and other forms of sales incentives."

Last week Chrysler announced it was getting out of offering leases on new vehicles through its financial arm, Chrysler Financial. The automaker said falling resale values of vehicles coming off lease were to blame.

Chrysler has said it will redirect its resources into financing deals to help customers purchase new vehicles.

But Fitch said it expects the change to result in a sales decline for Chrysler.

"Given the challenges in the bank, auto and capital markets, it is unlikely that third-party financing will step in to fully replace lost volumes," Fitch said. "Higher sales incentives are also unlikely to close this gap, resulting in lower production volumes at Chrysler."

Chrysler executives have maintained that the privately controlled automaker is meeting its financial targets and has issued statements that it is not considering bankruptcy.

Chrysler sales have dropped 22% so far this year, more than twice the rate of the industry as a whole.

Last week Chrysler indicated that it lost $431 million in the first three months of this year on its automotive business.

The automaker has said it ended 2007 with $9 billion of cash on hand.

The company also has tapped into a $2-billion loan allowed under the original deal with Daimler AG that gave Cerberus Capital Management majority control of Chrysler last August.

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