Investing.com -- S&P Global Ratings has revised its outlook on CNH Industrial N.V. (NYSE: CNH ) to negative from stable, while affirming its 'BBB+/A-2' long- and short-term issuer credit ratings, as well as its 'BBB+' issuer rating on the group's debt. The revised outlook follows CNH's larger-than-expected revenue contraction due to a downturn in the agricultural equipment sector.

In 2024, CNH reported a revenue decline of 23%. S&P Global Ratings anticipates a further contraction of around 18% in 2025. The downturn, which is sharper than the initially anticipated 15% decline in 2024 and 10% in 2025, is expected to impact profitability in 2025, with EBITDA margins forecasted to be between 9.5% and 10.0%. This falls below S&P's 11% target. However, margins are expected to recover to above 11% from 2026, coinciding with a predicted market recovery.

The downturn in the agricultural equipment market has been more severe than expected, resulting in an estimated 36% revenue deterioration from the end of 2023 to 2025. The downturn initially affected South America and Europe, before impacting North America from the end of 2024. CNH's revenue for 2024 was $17.1 billion, a 23% decrease compared to 2023.

Potential tariffs implemented by the U.S. administration, coupled with possible countermeasures, are expected to increase uncertainties for U.S. farmers. This might further delay investment decisions and extend the duration of the cyclical downturn. Despite these challenges, credit metrics under S&P's current base case remain supportive, with debt to EBITDA staying below 1x and funds from operations (FFO) to debt above 60% over the next 24 months.

CNH management has remained committed to a conservative financial policy, implementing measures to preserve cash flow and maintain the 'BBB+' rating. Management is preparing its supply chain for the next cycle by reducing stock and production in the second half of 2024. The company is expected to maintain capital expenditure in 2025 at about $500 million-$600 million, similar to 2024 levels, and lower than the $667 million spent in 2023.

CNH is expected to remain cautious about acquisitions or share buybacks until the cycle bottoms out. Dividend payments are forecasted to be at the lower end of the financial policy range at 25%. This will allow some cash flow to support a recovery in credit metrics. Leverage is expected to peak in 2025 at 0.5x-1.0x before falling to below 0.5x in 2026.

CNH, which generates about 40% of group revenue from North America, faces uncertainties related to the North American market. These uncertainties are likely to influence farmers' investment decisions. S&P Global Ratings believes there is a high degree of unpredictability surrounding policy implementation by the U.S. administration, particularly regarding tariffs, and the potential impact on global economies, supply chains, and credit conditions.

The negative outlook on CNH reflects the possibility of a ratings downgrade if the agricultural sector's downturn lasts longer than expected, preventing EBITDA margins from recovering to more than 11% within a two-year rating horizon and leading to lower-than-expected credit metrics. The ratings could also be lowered if CNH adopts a more aggressive financial policy, incorporating large debt-funded acquisitions, significant dividends, or share repurchases, or if it does not maintain high liquidity to ensure financial flexibility during a cyclical downturn.

S&P could revise its outlook to stable if CNH can weather the cyclical decline of the agricultural equipment market, thanks to improved profitability and a more flexible cost structure. This would be materialized by adjusted EBITDA margins above 11%, S&P Global Ratings-adjusted debt to EBITDA below 1.0x, and FFO to debt well above 60% on a sustainable basis.

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