By Jane Barrett
MILAN, Nov 26 (Reuters) - Fiat forges into final negotiations on job cuts with hard-fighting unions on Wednesday knowing ratings agencies will be watching like hawks for any softening of redundancy and debt-cutting plans.
Under intense pressure to dynamite its debt pile and revive its sputtering car arm, Fiat plans to lay off more than 8,000 staff for at least a year but unions and the Italian government are pushing the loss-making group to cushion the blow.
The impact has already been lessened slightly with Fiat saying it will reopen a politically sensitive plant in Sicily -- which was due to close but will now make a new version of the Punto city car -- before the one-year lay-offs have ended.
But if Fiat retreats too far, it risks backing into ratings agencies which are reviewing Fiat's debt in light of a restructuring plan which includes investments of 2.6 billion euros a year to remodel its slow-selling cars.
"Any significant changes to its restructuring plan, key for Moody's, could bring Fiat one step closer to high-yield (junk) territory," Eric Sharper, credit analyst at Dresdner Kleinwort Wasserstein, said in a note to clients.
Fiat hovers one step short of non-investment grade at all three major ratings agencies. Any new cut would push Fiat's cost of borrowing up significantly and cut off investors who are not allowed to hold "junk" from buying its bonds.
Moody's, which is due to wrap up its current review in the next weeks, is looking at possible cost savings from Fiat's restructuring. Fellow agency Fitch has said it could cut Fiat again if it misses cost-cutting targets.
Fiat is trying to cut costs and slash net debt to 3.6 billion euros by 2003 as agreed with creditor banks as part of a root-and-branch restructuring to pull it back into profit.
Moody's said loss-making Fiat Auto should lower operating costs by about one billion euros next year. Analysts have said Fiat's planned lay-offs, 83 percent of which would hit the car unit, should save the Turin-based group about 500 million euros.
About 5,550 workers were due to down tools and start on a company-and-government-funded lay-off scheme from next week but Fiat agreed to a two-week delay late on Monday and is due to start negotiations on its plan with unions on Wednesday.
Unions want alternatives to lay-offs at other plants, like spreading the output cut between more workers so more people are still employed even if they only work three weeks a month.
SALES AND STOCKPILES
Fiat is trying to cut output to slash back stockpiles of its cars, whose sales have been shrinking on a monthly basis as key Italian consumers are wooed by foreign models and as Fiat cuts back on unprofitable channels like rental car sales.
Fiat Auto made about 40 percent of last year's sales in Italy but its share of the domestic market slumped to an all-time low of 28.7 percent in June and October and sector sources said it was unlikely to be much above that in November.
Overall Italian car sales have slowed their fall since the government introduced incentives on eco-friendly cars in July but the measures have helped foreign models more than Fiat.
"The company just has no brand recognition. It isn't sexy enough to sell," said one analyst who asked not to be named.
Fiat's shares have underperformed the DJ Stoxx index of European car makers by about 35 percent so far this year.
Equity analysts were less concerned by the potential battle with unions, saying Fiat's problem was not so much cutting costs as restructuring its business and generating cash.
"Fiat has come up with plans to address excess capacity and to bring new products to boost revenues," said Greg Melich, an analyst at Morgan Stanley, whose investment banking arm is advising Italy's finance ministry on the Fiat crisis.