The Telegraph
Since 1st March, 1999
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Junk tag for Fiat debt

Paris, Dec. 24: Moody’s Investors Service has cut its ratings on roughly $ 15 billion of Fiat debt to ‘junk’ status, despite Fiat’s recent sales of assets worth more than $ 1.6 billion.

The credit downgrade, announced Monday, comes as Fiat has begun a broad overhaul to stanch losses at its struggling auto unit and to reduce its mountain of debt. Moody’s said its move was in response to Fiat’s operating performance, particularly at the battered automobile division, as well as its high debt levels and the likelihood that Fiat, even after shedding its car business, would still not merit an investor grade rating.

Fiat said in a statement on Monday that it was surprised by the rating cut, which it said “appeared unjustified”.

Fiat said earlier on Monday that it had concluded a deal to sell a 7.6 per cent stake in the Italian paper maker Cartiere Burgo. Fiat did not reveal the sale price, but said it would enable it to book a capital gain of $ 2 million. On Friday, Fiat sold 32 million shares in General Motors to Merrill Lynch, bringing in $ 1.6 billion. The company also said it expected as much as $ 410 million from the sale of Fidis, its consumer finance arm, to a group of creditor banks.

Fiat and General Motors, which owns 20 per cent of Fiat’s auto unit, said Fiat’s sale of its GM stake would not affect an option that allows Fiat to sell the remaining 80 per cent stake of Fiat Auto to GM after 2004.

Fiat’s chairman, Paolo Fresco, who narrowly survived a boardroom assault on his job earlier this month, has been pushing to shed assets to reduce debt, while at the same time returning the unprofitable auto division to the black.

Giancarlo Boschetti, the chief executive of Fiat Auto, said Fiat would spend 2.6 billion euros ($ 2.7 billion) in each of the next three years and roll out 21 cars, some of them new and others revamped versions of existing models.

Addressing an annual gathering of executives in Turin, the northern Italian city where Fiat is based, Boschetti said his goal was to lift the company’s European market share to roughly 10 per cent, from 8 per cent this year.

But Moody’s, in its note, said its action was “based on the assumption that the company will exit the automotive business of Fiat Auto by early 2004.” Fiat is also being reviewed for possible downgrade by Standard & Poor’s, as Fiat Auto, which generates roughly 40 per cent of the Fiat group's total revenue, continues to swallow cash.

Moody’s lowered Fiat’s senior unsecured debt ratings to Ba1 from Baa3, and its short-term debt rating to Not Prime from Prime-3. It said the outlook for the ratings remained negative. Moody’s also said it expected Fiat’s farm and construction equipment unit, Case New Holland, and its truck division, Iveco, to form the core of the Fiat business as the company gradually sheds assets.

But it said that while Iveco had a strong market position in Europe and strong cash flow, Case New Holland faced challenges from competition and from a downturn in its businesses, particularly in the slack North American market for farm and heavy construction equipment.

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