LONDON, May 16 (Reuters) - European corporate bonds fell in value in thin volume on Friday, with Fiat bonds in focus after a threat to downgrade the Italian auto giant, but French utility Veolia Environnement enlivened the primary market.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 90.2 basis points more than similarly dated government bonds at 1445 GMT, 0.6 basis point more on the day. The index yield neared two-year lows earlier this month after a strong rally.
"There is not that much spread movement because it's a Friday afternoon -- any real reaction to Fiat will be delayed until Monday," said a bond trader in London.
Moody's Investors Service said late on Friday it may cut Italian industrial group Fiat 's ratings. The rating review was primarily prompted by the continued underperformance of Fiat Auto, and weakening profitability in the first quarter of 2003 at two other major operations, CNH and Iveco. Moody's also cited the substantial operational challenges the group is likely to be confronted with in the medium term.
Fiat's bonds fell slightly in value in response to the downgrade threat, after rallying in recent weeks alongside other European corporate debt.
Its 6.75 percent bond due May 2011 was bid at around 94 percent of face value at 1435 GMT, according to Reuters data, giving a yield of 420 basis points more than benchmark government debt. The bond traded at around 86 percent of face value early last month.
VEOLIA BOND
The primary market saw French utility Veolia Environnement sell 1.75 billion euros of bonds in two tranches via lead managers Barclays Capital, Credit Lyonnais, Deutsche Bank and SG Investment Bank said.
The deal comprised one billion euros of bonds maturing in May 2013 and 750 million euros of bonds due in May 2018.
The 10-year bonds carry a 4.875 percent coupon and were priced to yield 95 basis points over the benchmark swaps curve swaps, or 110 basis points more than Bunds.
The 15-year bonds carry a 5.375 percent coupon and were priced to yield 107 basis points over mid-swaps, or 162.3 basis points over Bunds.
Formerly known as Vivendi Environnement, Veolia is rated Baa1 by Moody's Investors Service and BBB+ by Standard & Poor's. S&P revised its rating outlook to positive from stable on May 6.
Also from France, chemicals firm Rhodia plans to sell one billion euros worth of bonds on Tuesday or Wednesday next week, more than the 700 million euros initially planned, sources close to the deal said on Friday.
Junk-rated Rhodia plans to sell 400 million euros worth of senior notes in dollars and euros, sources said. The dollar bonds will yield 7.375 percent to 7.625 percent and the euro bonds will yield around 0.375 percent more than the dollar bonds.
The senior notes mature after seven years, but can be bought back by the company after four years.
Rhodia will also sell 600 million euros worth of senior subordinated notes in dollars and euros, sources said. The dollar bonds will yield around 1.5 percent more than the dollar senior notes and the euro bonds will yield 0.375 percent more than the dollar senior subordinated bonds.
The senior subordinated bonds mature after eight years and can also be bought back by the company after four years.
Joint bookrunners on the deal are Goldman Sachs, Bear Stearns International and BNP Paribas.
S&P has rated Rhodia's proposed senior subordinated notes BB-, its third highest "junk" grade, while Moody's assigned the bonds an equivalent Ba3 rating.
-- Additional reporting by Catherine Evans