MILAN: Moody's cut Fiat's credit rating on Wednesday to reflect its closer ties with US automaker Chrysler and the increased risk of a loss of market share in Europe and greater competition in Brazil.
Moody's, which had put Fiat on review for a possible downgrade in April, cut its rating one notch to Ba2 from Ba1, with a negative outlook.
It said it could further downgrade the rating in the face of an erosion of Fiat's market share in Europe, evidence that the management's industrial plan is not working, a weakening of the group's financial position or a deterioration in Chrysler's performance.
Moody's has a B2 rating on Chrysler, which Fiat has run since a 2009 bailout deal with the US government, controlling the company with a 53.5 percent stake.
The US agency said its downgrade of Fiat's rating mainly mirrored the closer integration with Chrysler, "which could result in the two companies having to support each other in the event of financial difficulty".
But it also took issue with Fiat's "relative infrequent model renewal rate", which it said constrained the group's competitive position as shown by its declining sales in Europe.
Fiat shares, which have shed nearly half of their value since early July amid fears of a global economic slowdown, extended losses after the downgrade and were down 3.9 percent at 4.14 euros by 1215 GMT.
CONCERNS OVER EUROPE, BRAZIL
Fiat sales in Europe fell nearly 13 percent in the first half of this year, and Chief Executive Sergio Marchionne has said he does not expect the European market to go well either this year or next.
At the Frankfurt car show last week, Marchionne also said he was reviewing volumes and the timing of new product launches because of the worsening financial crisis, but he has confirmed 2011 profit and revenue targets for the combined group.
"Possible decisions to delay the introduction of major new models could result in the group's competitive positioning being weakened, market share losses and continued under-absorption of fixed costs, especially in Europe," Moody's analyst Falk Frey said.
Moody's also pointed to risks for Fiat in Brazil, its most profitable market, due to weaker demand, increasing price pressures and growing overcapacity.
"I think there could be problems with the Chrysler integration; the plan looks over ambitious. And for Fiat, there is a big question mark over Brazil -- they are not the only one investing there, and if that market slows down, margins will be narrower, in line with what is happening in Europe," said one analyst who declined not to be named.
Alessandro Frigerio, a fund manager with RMJ, noted a sharp rise in Fiat's 5-year CDS since the beginning of July highlighted investors' perception of increased credit risks.
Fiat expects liquidity of around 18 billion euros ($25 billion) by year-end, but analysts have been worrying about its rising net debt, forecast at between 5 billion and 5.5 billion euros from 3.4 billion euros in the second quarter.
Fiat is due to raise its stake in Chrysler to 58.5 percent at the end of 2011 but must decide what to do with the 41.5 percent of the US automaker that is held by the VEBA union trust fund.
Marchionne had initially planned an IPO, but said last week that it was not possible for now because of worsening market conditions. If he goes for a full takeover of Chrysler, he needs to convince ratings agencies that the group's finances are solid enough.
Standard & Poor's, which cut its rating on Fiat in February, also has a negative outlook on the company.
By 2014, Fiat and Chrysler are targeting around 100 billion euros in combined revenues -- up from 58 billion euros at the end of 2011 -- and sales of 6 million units.
Copyright Reuters, 2011
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