In a move that could further sharpen Volkswagen’s auto financing edge in Europe, Moody’s Investors Service has further downgraded Fiat SpA’s and PSA Peugeot Citroen’s credit ratings deeper into junk territory.
Moody’s cut both OEM’s corporate family ratings from ‘Ba2’ to ‘Ba3’, three notches below investment grade, with a negative outlook. The rating of the notes issued by Fiat Finance & Trade Ltd S.A. and by Fiat Finance North America was lowered to ‘Ba3’ from ‘B1’. The outlook on both companies is negative. Moody’s said it would consider downgrading Fiat further if standalone net industrial cash flow were to exceed a negative €2bn (US$2.57bn) in 2012 and not improve in 2013.
Moody’s also said PSA’s financing arm, Banque PSA Finance (BPF), was on review for a downgrade. Analysts believe this could happen soon as Moody’s has made it clear that it would keep its two-notch gap between BPF and PSA. The move is expected to increase BPF’s financing costs and hit its operational margin.
PSA was previously cut to three levels below investment grade by Fitch Ratings in September.
The move affects about €9.3bn of Fiat’s debt and €5.6bn of PSA’s.
Moody’s noted its downgrade of Fiat reflected declining demand for cars in Italy, which accounts for more than half of the OEM’s European sales. It added that Fiat’s goal to reach break-even level in trading profits in Europe by 2014 had become “very challenging” because of a worsened trading environment.
The ratings agency also warned that the Italian OEM’s strategy of delaying new model introductions “might further derail Fiat’s competitive position in Europe, against the background of major new model launches from its competitors.” It also said Fiat could be vulnerable to greater competitive pressures in Brazil, its most profitable market, and underscored that Fiat SpA lacks access to funds held by its Chrysler unit to offset the cash drain in Europe.
Falk Frey, a Moody’s Senior Vice President and lead analyst for Fiat, said in a statement: “The one-notch downgrade of Fiat’s ratings to Ba3 reflects the decline in demand for Italian cars recorded so far this year and our outlook for demand till the end of 2012 and beyond.”
Moody’s believes PSA’s effort to restructure and turn round its automotive division faces challenges from a worsening environment in its key markets, with declining demand and increasing price pressure, especially in the small-car segments. According to a Reuters report, the agency noted: “As Moody’s currently expects the downward trend in more car sales in western Europe to continue well into 2013, PSA might need to take further actions in order to stabilise its operations and achieve the targeted turnaround as announced.”
The credit ratings of Fiat and PSA are now six levels below the VW corporate rating of ‘A3’ (Moody’s) and this may further enhance the German OEM’s ability to promote competitive financing to dealers and consumers. Moody’s assigns ‘A3’ ratings on Volkswagen AG, Volkswagen Financial Services AG and Volkswagen Bank GmbH, all with positive outlooks. Standard and Poor’s assigns ratings of A- to all three, again with positive outlooks (revised from stable on 27 August 2012).
Unsurprisingly, Fiat Chief Executive Officer Sergio Marchionne responded: “The downgrade doesn’t reflect Fiat’s financial conditions globally. They highlight an issue that impacts the whole industry, not just Fiat.”
