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Fitch Downgrades Chrysler's IDR to 'B'; Outlook Negative

Business Wire, May 7, 2008

CHICAGO -- Fitch Ratings has downgraded the Issuer Default Rating (IDR) of Chrysler LLC to 'B' from 'B+', with a Negative Rating Outlook. Fitch has also downgraded the senior secured bank facilities as listed below, based on the downgrade of the IDR and Fitch's recovery rating methodology. The downgrade reflects the decline in unit volumes and revenues resulting from weak economic conditions, modest share losses, certain strategic initiatives, and the effect of these factors on the company's operating performance. Chrysler's restructuring efforts remain on track, and liquidity is expected to remain adequate over the near term to fund restructuring costs and operating losses through a period of economic weakness.

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Since 2000, Chrysler's market share losses have been more moderate than at Ford and GM, requiring fewer reductions in assembly capacity and the associated fixed costs. In a stable revenue environment, this would allow cost reductions to flow more quickly to the bottom line. However, the severe impact of weakening economic conditions has made this more challenging, and has extended the timeline projected for a potential reversion to positive cashflow. The steep decline in 2008 unit sales also results from strategic initiatives undertaken at Chrysler following its management changes, including reduced fleet sales, product eliminations and inventory reductions, steps that are viewed positively for the company's long-term prospects.

Unit volumes in 2008 and into 2009 will be aided by the new Dodge and Chrysler minivan offerings, the Dodge Journey crossover, the low-volume Dodge Challenger, as well as the fall launch of the redesigned Dodge Ram pickup. Several products at the smaller end of Chrysler's lineup, including the Dodge Caliber and Jeep Patriot, have supported unit volumes as consumers migrate to smaller, fuel-efficient vehicles. On a consolidated basis, however, these factors will be more than offset by weakness in the larger end of the company's product portfolio -- the effect of a depressed residential construction market on Chrysler's key pickup lineup, high gas prices, and the impact of general economic conditions on industry sales. Chrysler's efforts to sharply curtail fleet sales and to convert its sales/production strategy to a 'demand-pull' model from a 'production-push' model will further affect sales declines in 2008. International sales, representing approximately 10% of production, are likely to continue to grow at double-digit rates, providing modest support to consolidated sales and capacity utilization.

Chrysler's cash flow will remain negative in 2008, due to capital investments, restructuring costs and other one-time items. The company is realizing substantial reductions to its fixed-cost structure, the bulk of which have resulted from salaried and hourly headcount reductions. Variable purchasing, material and other efficiencies have been more difficult to realize as rising commodity costs have offset other progress. Cost reductions and the new UAW contract have positioned the company to moderate operating losses during the current economic weakness, but a return to positive free cash flow is likely to require continued execution on the company's cost reduction efforts and a stabilization in market share and industry sales. Chrysler also faces pending CAW contract negotiations.

Liquidity levels (supported by incremental debt from a delayed-draw term loan and a $1.6 billion note to the UAW as part of the VEBA agreement), are expected to be sufficient to weather weak economic conditions and finance operating and restructuring costs over the near term.

New management has resulted in a number of strategic and product adjustments that are quickly being brought to market. Fitch expects that Chrysler will continue to employ an 'asset-lite' approach that could involve additional assembly plant shutdowns. Alliances and/or contract manufacturing will play a role in this decision, and Chrysler is expected to continue to pursue such arrangements on a global basis. Tie-ins with other global OEMs are expected to focus on growth in the company's brand, engineering and distribution capabilities, but requiring minimal capital investment. The relationship with Daimler, which owns 19.9% of Chrysler, remains a modest positive to the rating because of Chrysler's access to certain Daimler technology.

The Recovery Rating (RR) on the second lien has been downgraded from 'BB+/RR1' to 'CCC+/RR6' based on lower asset value assumptions and associated recoveries in the event of a stress scenario.

Fitch has downgraded the following:

--IDR to 'B' from 'B+';

--Senior secured first-lien bank loan to 'BB/RR1' from 'BB+/RR1';

--Senior secured second-lien bank loan to 'CCC+/RR6' from 'BB+/RR1'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Business Services Industry

Fitch Downgrades Chrysler's IDR to 'B'; Outlook Negative

Business Wire, May 7, 2008

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