LONDON, Dec 24 (Reuters) - Bonds of Italian automaker Fiat are set to dominate the European high-yield debt market's benchmark index following the company's downgrade to "junk" status, analysts said on Tuesday.
Fiat, with roughly 6.5 billion euros in outstanding qualifying bonds, will take top place in Merrill Lynch's European High-Yield index from the end of the month.
Based on Monday's closing prices Fiat will account for 16.73 percent of the index, topping telecom equipment maker Alcatel's 10.57 percent, a Merrill Lynch banker said.
In the European currency index, which also includes sterling debt, Fiat will account for 7.58 percent, behind Alcatel's 10.28 percent.
The recent proliferation of fallen angels -- former investment grade companies with large debt loads -- has caused problems for investors with portfolios based on the high-yield bond indices, as they are forced to buy debt which has already lost, and may continue shedding, much of its value.
In response to investor concerns, Merrill recently introduced a series of constrained indices. In the European index no issuer can account for more than three percent of the market.
"For those investors using Merrill Lynch's constrained indices this will be a lesser concern because of the three percent cap," said Joseph Nehorai, a portfolio strategist at Merrill's.
Moody's Investors Service on Monday cut Fiat's senior unsecured debt ratings by one notch to Ba1, its highest junk grade, from Baa3. It said Italy's largest manufacturer suffered from losses at its auto unit and a high debt load totalling around $15 billion.
Fellow rating firm Standard & Poor's is expected to decide whether it will also cut Fiat to junk by the end of January.