Will CNH’s Money Woes Affect Other Ag Equipment Makers?
Strapped with $6.43 billion of debt that will come due this year, Italian automaker Fiat is putting pressure on its agricultural equipment unit, CNH Global, to repay a $5.2 billion loan it took from its parent company last year. CNH took the loan from Fiat because of declining business volumes for its products when the U.S. economy slumped.
"We hope that within the next 12 months the cash that Fiat loaned CNH will come back to Italy," Chief Executive Sergio Marchionne told shareholders at their annual meeting on March 27. Fiat owns more than 80% of CNH's outstanding shares.
According to various published reports, that loan is weighing heavy on Fiat's finances and is raising concerns about the company's ability to pay off its own debt at a time when it's working on a partnership with troubled U.S. carmaker Chrysler LLC.
Marchionne also reiterated Fiat's readiness to play a role in what he expected to be a consolidation of the car industry in the next 24 months.
Concerns About Ag
How CNH, which manufacturers Case IH and New Holland farm equipment, as well as Case and New Holland construction machinery will pay off the loan to its parent is leading to concerns about what the company may do in its attempts to draw down its debt.
Because most industry analysts have already written off the construction end of the business in 2009 due to the continuing worldwide financial crisis, it's believed that much of the pressure will fall on the ag equipment unit.
CNH reported fourth-quarter 2008 sales of farm machinery were up 8% at about $3 billion, while construction equipment sales were off 48%. For all of 2008, CNH's farm equipment sales were up 30% over 2007.
That's not expected to hold up in 2009 as the financial crisis appears to be finally trickling down to agriculture, which had been relatively insulated from many of the difficulties other industries were dealing with throughout 2008.
In its year-end report, CNH projected that sales of high-horsepower tractors could slip as much as 10-15% and combines 20-25% this year.
Some ag industry observers are speculating that CNH could resort to discounting the price of its farm machinery in order to pump up sales. The company may feel that it has some breathing room, as its operating margins during '09 (12.46%) were higher than that of its chief rivals Deere & Co. (10.1%) and AGCO (6.71%). This could pressure others to do likewise — including shortline equipment makers — to maintain their own sales levels in what could be a tougher year for the industry.
CNH announced on March 27 that it had issued the first portion of an asset-backed security (ABS), the proceeds of which will help it pay back a loan to the group, Fiat's chief executive said. "The first ABS tranche in the U.S.cost more than normal but the market is opening up," Marchionne said during Fiat's annual meeting. The security was worth $500 million and did not use the U.S. Term Asset-Backed Securities Loan Facility (TALF).
It didn't help when, on March 31, Standard & Poor's Ratings Services cut its long- and short-term ratings on Fiat into junk. S&P said Fiat's liquidity position is weak in light of looming debt maturities and added that its long-term rating remains on watch for further downgrades within the next 90 days, but the short-term rating was taken off CreditWatch.
Back to the U.S.
Many industry observers also believe that what's driving Fiat to pressure CNH to pay its loan quickly is the company's determination to re-establish itself as a significant player in the U.S. automotive market after a 25-year hiatus.
According to published reports, Fiat engaged in discussions last year with Volkswagen, BMW, Nissan, Ford and others to find a partner to help the company build and sell its cars in the U.S. Chrysler would provide Fiat with the cheapest and fastest route to get back into the North American market.
The proposed deal would give Fiat a 20% stake in Chrysler in exchange for small-car technology. And if the two sides get a deal, the company will have $6 billion in federal money to spend on restructuring. Fiat could also utilize Chrysler's dealer network to sell Fiats within a year or two.
Chrysler "could be the least expensive way into the U.S. for Fiat," says former Chrysler President Thomas Stallkamp.
Some have also suggested that Fiat could skip Chrysler and get Saturn on the cheap from GM or hire Ford to make vehicles in underutilized plants. The two already build cars together in Poland.
At the same time, partnering with Chrysler would probably establish Fiat in the U.S. market faster. It would give them U.S. distribution and access to Chrysler know-how to adapt its cars to the U.S. market.
Marchionne has repeatedly predicted that consolidation will leave only a half-dozen major automakers worldwide within 2 years. As the industry's number nine player, Fiat sold just 2.1 million vehicles last year, less than half the 5.5 million Marchionne says is needed for sustained profitability.
One published report surmised, "The question is whether Chrysler can survive long enough to get the Chrysler-Fiat models into U.S. showrooms."
A bigger question for the ag industry is what Fiat's push to maintain and grow its automotive brand will do to its efforts in the farm equipment business.
Source: Ag Equipment Intelligence