DBRS Morningstar Confirms Rating on CNH Industrial N.V. at BBB (low) with Stable Trend

DBRS Ratings Limited (DBRS Morningstar) confirmed the rating on CNH Industrial N.V. (CNHI or the Company) at BBB (low) with a Stable trend.

The confirmation reflects that the Company's credit profile (a combination of its business and financial profile) is commensurate with the current rating.

The rating is supported by (1) CNHI’s size, which allows for scale efficiency; (2) geographical diversification; (3) brand recognition; and (4) a sizeable financial services operation, with a geographically well-diversified receivables portfolio. DBRS Morningstar’s BBB (low) rating also incorporates the following risks: (1) the Construction Equipment and Commercial & Specialty Vehicles segments face strong competition; (2) highly cyclical demand; (3) volatile materials pricing; (4) reliance on the asset-backed securities market as a substantial component of CNHI’s funding strategy; and (5) emerging market risk.

DBRS Morningstar expects CNHI's financial profile to weaken in the next six to nine months because of continued dealer inventory destocking and the adverse impact of the Coronavirus Disease (COVID-19) pandemic on its operations (weaker market demand and supply chain disruptions). Nevertheless, DBRS Morningstar expects that the Company, supported by improving market conditions, will recover to well within the current rating range by the end of 2021, justifying the Stable trend for the rating.

CNHI announced a new five-year 2020–24 business plan, Transform2Win, in September 2019, that detailed strategies to boost growth and performance at its five operating segments through innovation, business simplification, enhanced cost management, and asset optimisation. Transform2Win details functional and segment strategies as well as associated performance targets. DBRS Morningstar notes that executing the Transform2Win programme and achieving the stated performance targets would strengthen the Company's business profile. In addition, CNHI also plans to separate its On-Highway (commercial vehicles and powertrain) and Off-Highway (agricultural, construction and specialty) assets into two companies. The Company now expects the spinoff of the On-Highway business, initially scheduled for early 2021, to be delayed because of negative market conditions.

Operating results in 2019 weakened modestly compared with 2018 with all four industrial businesses, known as Industrial Activities (IA), and the Financial Services business reporting weaker year-over-year results. Lower sales volumes because of softer market conditions and actions taken to reduce dealer inventory were the key factors contributing to the decline in net sales and operating profits in IA. Nevertheless, all key metrics at the end of 2019 were still at the high end of the current rating range. The advent of the coronavirus in early 2020 and restrictive actions taken by governments aimed at slowing the spread of the virus led to supply chain disruptions and a collapse of economic activities globally. These market headwinds together with ongoing destocking actions at dealers led to a sharp deterioration in operating results in Q1 2020.

RATING DRIVERS
DBRS Morningstar, in its base-case scenario, assumes that (1) GDP in the major developed economies in Europe will decline by 6.5% and the U.S. by 5.0% in 2020 but that both regions will experience 4.5% growth in 2021 and (2) the spin-off of the On-Highway business will occur after 2021. Under this scenario, DBRS Morningstar expects market conditions to be weak in all of CNHI's industrial businesses through the rest of 2020 and operating results to be meaningfully weaker in 2020 than 2019. Furthermore, DBRS Morningstar anticipates a recovery to start in Q4 2020 and the recovery momentum to gain strength sequentially, leading to a solid but not full recovery in 2021. Under the base case, DBRS Morningstar expects CNHI's financial profile to weaken in 2020 to levels at the low end of the rating range and to recover in 2021 to levels well within the range for the current rating.

DBRS Morningstar expects the rating to remain stable in the near term unless the spinoff of the On Highway business unexpectedly weakens the Company's credit profile. However, DBRS Morningstar would take negative rating action if CNHI's financial profile fails or is unlikely to strengthen as assumed in DBRS Morningstar’s base case scenario by the end of Q2 2021. DBRS Morningstar would take positive rating action if the Company strengthens its business profile, such as by successfully executing the Transform2Win programme, and the Company’s financial profile strengthens to the high end of the BBB range.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodologies are Rating Companies in the Industrial Products Industry (5 February 2020) and Rating Companies in the Automotive Manufacturing and Supplier Industries (28 October 2019). Other applicable methodologies include the DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (25 November 2019). These can be found can be found at: http://www.dbrsmorningstar.com/about/methodologies.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include the company’s annual account and any public information available. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: YES

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/362244.

Ratings assigned by DBRS Ratings Limited are subject to EU and U.S. regulations only.

Lead Analyst: Valentino Teobaldo Daprile, Senior Vice President
Rating Committee Chair: Charles Halam-Andres, Managing Director
Initial Rating Date: 24 October 2013
Last Rating Date: 11 June 2019

DBRS Ratings Limited
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London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

--Rating Companies in the Automotive Manufacturing and Supplier Industries (28 October 2019):
https://www.dbrsmorningstar.com/research/352181/rating-companies-in-the-automotive-manufacturing-and-supplier-industries

-- Rating Companies in the Industrial Products Industry (5 February 2020):
https://www.dbrsmorningstar.com/research/356434/rating-companies-in-the-industrial-products-industry

-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (25 November 2019):

https://www.dbrsmorningstar.com/research/353260/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.