Fiat Rating Falls Deeper into Junk-Bond Territory

Moody's Investors Service has lowered its credit rating for Fiat SpA by one notch to Ba3, three rungs below investment grade, because of Europe's flagging car market. Moody's expects demand to drop 20% this year in Italy, where Fiat derives more than half its European sales.

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 this year and doesn't improve in 2013.

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 downgrade widens the company's 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, thus enabling the German carmaker to offer better financing deals to consumers.