(Adds byline, bond price and comment in paras four and five, share price in para six, debt details in paras 10 and 11)
By Richard Lindsay
LONDON, Dec 23 (Reuters) - Italian auto giant Fiat could still have its credit ratings cut despite selling its holding in General Motors and its European finance unit Fidis in order to cut debt, Standard & Poor's said on Monday.
"These sales do not come as a surprise to us and the sale of the Fidis finance unit is already factored into our analysis," said Virginie Casin, an analyst at the ratings agency. "Fiat remain on review for a possible downgrade and these sales do not mean they will not be cut."
Fiat's short-term and guaranteed commercial paper ratings from S&P are at A-3, just one notch above "junk". The review should be complete by the end of January, Casin said.
Fiat's bonds slipped on the news. Its 5.75 percent euro bond due May 2006 was bid as low as 84.2 percent of face value on Monday, a percentage point below where it closed on Friday. However, the spread between the bid and the offer on the bond was wide -- a full two percentage points with the offer at 86.19 percent of face value by 1140 GMT.
"It is not a very liquid market and the wide bid/offer spread reflects that," said a trader at a British bank on Monday. "The news was not unexpected and does little to address the fundamental issues of a weakening core business, a fairly grim 2003 outlook, at Fiat."
Fiat's shares, however, where buoyed by the sales. It traded at 8.35 euros at 1140 GMT -- up 2.5 percent.
Fiat announced the sale of its stake in partner General Motors Corp. for $1.16 billion late on Friday.
The sale should help Fiat towards a target to cut net debt to less than 3.6 billion euros by early 2003 and took the heat off Fiat's need to sell other assets to cut borrowing and avoid a debt downgrade.
The firm also sold 51 percent of its European financing unit Fidis to its four top creditor banks -- a deal which should knock about six billion euros off its gross debt, which stood at 32.8 billion euros at the end of September. The reduction would come mainly through Fiat deconsolidating customer debts, passing the liability on.
There is still some way to go on debt-slashing as Fiat has promised creditor banks that it will cut gross borrowing to 23.6 billion euros by early next year, setting a net debt goal of three billion euros from 5.8 billion in September.
The banks gave Fiat a three billion-euro rescue loan in May and if the sputtering carmaker misses its debt goals, the creditors can convert the debt into equity, effectively taking control of the group from the founding Agnelli family.