By Christian Plumb and Kirsten Donovan
MILAN/LONDON, Dec 24 (Reuters) - Italian industrial group Fiat's uphill road to recovery just got steeper.
In the latest blow to the crisis-rocked company, credit ratings agency Moody's Investors Service on Monday downgraded $15 billion in Fiat debt to junk and highlighted how its woes have stretched beyond the crisis-hit auto unit.
The move, though widely expected, will raise the group's already weighty financing expenses, throwing a new wrench into the national industrial icon's bid to revive the car division which still accounts for about 45 percent of its sales.
"This will drive up their borrowing costs which are already at a high level, I would think," said Vivek Tawadey, a senior credit analyst at BNP Paribas in London. "Fiat does not have ready accesss to the capital markets as things stand today."
He said Standard & Poor's was also likely to carry out a threatened downgrade on Fiat's debt, reflecting a nosedive in sales and market share by Fiat Auto, which is expected to post an operating loss of over one billion euros this year.
Fiat is implementing a last-ditch overhaul calling for thousands of layoffs, aimed at stemming the losses.
Even worse, Moody's said for the first time that even if Fiat exercises an option to sell General Motors Corp the 80 percent of Fiat Auto it does not already own, the rest of the group will probably still not merit an investment-grade rating.
"We had thought the residual businesses would make it to investment grade but only just," Tawadey said. "Clearly the Moody's analyst had some information at hand that made him take this decision."
In particular, Moody's cited weakness at Fiat's money-losing U.S. based tractor maker CNH Global NV , which, together with truck maker Iveco, would form the core of the group's operations after the Fiat Auto sale.
There was little immediate market reaction, with the Milan bourse shuttered and bond markets virtually so, but traders said Fiat debt would weaken further, forcing the Turin-based group to pay an even higher premium to holders of its debt.
OWNERSHIP SHIFT CLOSER
"It's true that the downgrade was discounted, but the timing was unexpected," a trader said.
The ratings cut also moves Fiat a step closer to a long-term shift in its ownership away from the founding Agnelli family.
If Fiat's debt stays below investment grade, its main creditor banks will have an option in 2004 to convert a three billion euro loan into equity, a move that would make them the group's largest shareholder.
The loan deal with IntesaBci , Sanpaolo , UniCredito and Capitalia was one of several fruitless efforts by Fiat this year to stave off a downgrade.
Fiat on Monday called the Moody's move "surprising and unjustified".
Sources close to the banks said they were in no hurry convert, a step that would saddle them with substantial losses at current Fiat share prices.
The downgrade will not affect Fiat's option to sell the auto division to GM.
"The rating action has no effect on the validity of the put option and the possibility of exiting the auto business by exercising that option," said Moody's vice president Falk Frey.
The GM put option remained an important asset despite Moody's declaration that the other parts of the group might also not be investment grade.
"Moody's appears to be playing a game of 'brinksmanship' with Fiat indicating that it cannot expect to maintain its current, albeit lower credit rating and retain ownership of Fiat Auto," said Bear Stears credit analyst Matthew Little in a research note.
He added that Fiat may still seek to delay the sale amid strong political pressure to keep the group Italian.