Chrysler 2010 Annual Report Download - page 44

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RISKS ASSOCIATED WITH FINANCING REQUIREMENTS
The Group’s future performance will depend on, among other things, its ability to finance debt repayment
obligations and planned investments from operating cash flow, available liquidity, the renewal or refinancing
of existing bank loans and/or facilities and possible recourse to capital markets or other sources of financing.
Although the Group has measures in place to ensure that adequate levels of working capital and liquidity are
maintained, any declines in sales volumes could have a negative impact on the cash-generating capacity of its
operating activities. The Group could, therefore, find itself in the position of having to seek additional financing
and/or refinance existing debt, including in unfavorable market conditions with limited availability of funding
and a general increase in funding costs. Any difficulty in obtaining financing could have a material adverse
effect on the Group’s business prospects, earnings and/or financial position.
RISKS ASSOCIATED WITH FIAT S.P.A.’S CREDIT RATING
The ability to access the capital markets or other forms of financing and the related costs are dependent,
amongst other things, on the Group’s credit ratings. Following downgrades by the major rating agencies in the
first quarter of 2009, Fiat S.p.A. is currently rated below investment grade with ratings on its long-term debt
of Ba1 (with negative outlook) from Moody’s Investors Service, BB+ (with negative outlook) from Standard
& Poor’s Ratings Services and BB+ (with negative outlook) from Fitch Ratings Ltd.
On 23 April 2010, following Fiat’s announcement of the proposed Demerger, Standard & Poor’s placed Fiat
S.p.A. on CreditWatch with negative implications. The CreditWatch status was confirmed on 1 October 2010
and the rating agency is currently reviewing the Company’s status. On 21 July 2010, Moody’s Investors Service
placed Fiat S.p.A.’s rating on review for possible downgrade. That review was completed on 9 February 2011
and Moody’s confirmed a rating of Ba1 with negative outlook. On 22 April 2010, however, Fitch Ratings Ltd.
confirmed its rating (BB+ with negative outlook) on Fiat’s long-term debt.
Any further downgrades could increase the Group’s cost of capital and potentially limit its access to sources
of financing with a consequent material adverse effect on the Group’s business prospects, earnings and/or
financial position.
RISKS ASSOCIATED WITH FLUCTUATIONS IN CURRENCY, INTEREST AND CREDIT RISK
The Group, which operates in numerous markets worldwide, is naturally exposed to market risks stemming
from fluctuations in currency and interest rates. The exposure to currency risk is mainly linked to the difference
in geographic distribution between the Group’s manufacturing activities and its commercial activities, resulting in
cash flows from exports denominated in currencies that differ from those associated with production activities.
The Group uses various forms of financing to cover funding requirements for its industrial activities and for
financing customers and dealers. Moreover, liquidity for Industrial Activities was also principally invested in
variable-rate or short-term financial instruments. The Financial Services companies operate a matching policy
to offset the impact of differences in rates of interest on the financed portfolio and related liabilities. Nevertheless,
changes in interest rates can result in increases or decreases in revenues, finance costs and margins.
Consistent with its risk management policies, the Group seeks to manage risks associated with fluctuations
in currency and interest rates through the use of financial hedging instruments. Despite such hedges being in
place, sudden fluctuations in currency or interest rates could have an adverse effect on the Group’s business
prospects, earnings and/or financial position.
The Group’s Financial Services activities are also subject to the risk of insolvency of dealers and end customers,
as well as unfavorable economic conditions in markets where these activities are carried out, which the Group
seeks to mitigate through the credit approval policies applied to dealers and end customers.