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Fiat: The next VW?


Image source: VolhaHanna Kanashyts / Shutterstock, Inc.

What's going on?

Late on Thursday, the US government accused automaker Fiat Chrysler of cheating on emissions tests – just one day after Volkswagen (VW) settled a similar charge for more than $4 billion.

What does this mean?

Fiat’s CEO has vehemently denied the allegations and attempted to draw a line between his company’s behavior and that of VW, saying he’s “really pissed off” about reports that equate the two. Whereas VW admitted to installing illegal software to mask emissions output, Fiat has (so far, at least) only been accused of failing to disclose potentially illegal devices to authorities (Fiat says its devices were legal).

Why should I care?

For the stock: It’s a highly uncertain situation for Fiat’s investors.
If the issue remains merely Fiat’s non-disclosure of the device, it will be far less costly than if it’s found to have hidden an illegal device from regulators. Adding to this dynamic are the shifting political winds: investors are unsure of how a new US presidential administration will influence the outcome. However, Volkswagen’s case has set a standard: a heavy fine and arrests of executives. Following so closely on the heels of VW, Fiat is also at risk of a big fine and investors are fearful: the stock has declined about 20% since the news broke.

The bigger picture: Debt increases risk in times of crisis.
When VW’s scandal broke, it had more than $30 billion of cash to help pay for it. Fiat, by contrast, is in billions of dollars of debt. Absorbing a large fine could be a problem: Fiat would likely have to borrow more money and, quite possibly, raise more cash from shareholders (which would mean existing shareholders would own proportionally less of the company). As we’ve seen with other companies, significant debt increases the risk for shareholders.

Originally posted as part of the Finimize daily email.

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