Fiat, PSA Ratings Fall Deeper into Junk-Bond Territory

Moody's Investors Service has lowered its credit ratings for Fiat SpA and PSA Peugeot Citroen because the agency expects Europe's car market to sink 3% in 2013 from this year's 17-year low.

Each company's rating was cut one level to Ba3, three rungs below investment grade.

Moody's says PSA's current restructuring may not be able to halt its cash outflow by 2014 because of declining demand and intensifying pressure on vehicle prices. The agency cautions that it may lower its rating for the company's finance arm, Banque PSA Finance.

Moody's cites Fiat's heavy reliance on Italy's hard-hit auto market. The agency notes the company is unable to offset its cash drain by tapping the cash hoard of affiliate Chrysler Group LLC because it hasn't yet gained full control of the American company. Moody's warns it would consider another downgrade if Fiat's cash outflow exceeds €2 billion in 2012 and doesn't improve next year.

The agency says the company's delay in introducing new and redesigned models could "further derail" its competitiveness in Europe. Fiat suspended some product investments to conserve cash, contending it would be pointless to launch new vehicles during the downturn.

Bloomberg News notes that the downgrades widen the companies' disadvantage to rival Volkswagen AG. VW, with a rating three steps above junk-bond level, is able to borrow at a lower rate than Fiat and PSA, thus enabling the German carmaker to offer better financing deals to consumers.