PSA/Peugeot-Citroen and Fiat had their debt ratings lowered to three levels below investment grade by Moody's Investors Service as slumping European car markets take a toll on the automakers' finances.
Fiat and PSA both were taken further into ''junk'' territory as the carmakers were cut one level to Ba3 from Ba2, Moody's said on Wednesday in separate statements. The ratings service has a "negative" outlook on the companies.
The drop to a Ba3 rating is evidence that the agency believes both automakers face significant problems with exposure to adverse business, financial or economic conditions that could result in their inability to meet financial commitments.
PSA's efforts to halt its cash burn by 2014 "may not be sufficient" with western European vehicle demand poised to fall a further 3 percent next year and pricing pressure increasing, Moody's analyst Falk Frey said.
Fiat is burdened by a slumping Italian market and a lack of access to cash held by its Chrysler unit, Frey said.
PSA and Fiat have both been hard hit by the effects of the European debt crisis on the region's auto demand. Car sales are set to fall to a 17-year low in 2012. The French and Italian carmakers rely on their home regions for the bulk of sales and lack major operations elsewhere to soften the blow.
Car demand in western Europe will probably remain below pre-crisis levels until at least 2019, Volker Krueger, an analyst with LMC Automotive, said on Wednesday at an event in Paris.
The International Monetary Fund cut its global growth forecast on Tuesday and warned of even slower expansion should European officials fail to address threats to their economies.
PSA, which was already cut to three levels below investment grade by Fitch Ratings last month, agreed to sell a 75 percent stake in its Gefco logistics unit to raise cash as it burns through about 200 million euros ($257 million) a month. The Paris-based manufacturer's credit grade was cut by all three main ratings services after the company reported a 662 million euro first-half loss at its automaking unit.
Fiat CEO Sergio Marchionne said this week that the Italian manufacturer will lower its forecast for the European auto market through 2014 when the company updates its five-year plan later this month. Fiat is set to lose 700 million euros in Europe this year as its market share tumbles. In 2011, it lost 500 million euros in Europe.
Moody's said it would consider downgrading Fiat further if stand-alone net industrial cash flow were to exceed a negative 2 billion euros in 2012 and not improve in 2013.
Speaking to Reuters on the sidelines of a conference on Wednesday, Marchionne said he disagreed with Moody's decision to downgrade Fiat: "The decision was expected but I don't share it."
To tighten its control of Chrysler Group and eventually gain access to its cash, Fiat asked a U.S. court last week to confirm the price it has to pay the United Auto Workers retiree health fund for an additional 3.3 percent in the third-largest American carmaker. Fighting over these small slices may be Fiat's only option, as buying the rest of Chrysler in one go could stress the Italian company's finances further.
"If they do it in one go, this would be a negative development that may have negative rating implications," Eric Tanguy, director of corporate ratings for Standard & Poor's in Paris, said Tuesday at an event in Frankfurt.
Moody's downgrades on Wednesday affect about 14.9 billion euros ($19 billion) of debt, including about 9.3 billion euros from Fiat debt and 5.6 billion euros from PSA, the agency said.
Automotive News Europe contributed to this report