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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," said Casin, adding the review should be finished by the end of January.
Fiat is also being reviewed by Moody's ratings agency as its core Fiat Auto unit continues to burn cash, dragging the company that was once Europe's biggest car maker deep in to the red.
Creditor banks threw Fiat a three billion euro lifeline in May, exacting the promise that the Turin-based company would slash net debt to three billion euros in early 2003 from 5.8 billion at the end of the third quarter.
On Friday, Fiat said it had sold its near six percent stake in GM -- which it swapped in exchange for 20 percent of Fiat Auto in 2000 -- for $1.16 billion which it said would "substantially improve" its net debt position.
Fiat's shares climbed on the news, up 1.7 percent at 1300 GMT against a 2.4 percent fall in the sector but one Milan-based trader said the rise was an overreaction.
"This deal is like somebody touching up their make-up. It doesn't change what's underneath," the trader said.
Fiat's bonds fell on news that S&P could still cut its A-3 rating on the group's short-term and guaranteed commercial paper. Any cut would push Fiat into "junk" territory.
Fiat's 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."
SALES LIST
The GM stock sale should drive Fiat some of the way towards its debt goals, which include a target to cut gross debt to 23.6 billion euros by early 2003 from 32.8 billion in September.
The targets have a 20 percent margin and if they are missed, the banks can convert the debt into shares, effectively taking control of Fiat from the founding Agnelli family.
Fiat said on Saturday its gross debt pile should fall by about six billion euros in the first quarter of 2003 when it sells its customer financing arm Fidis to its key creditors, passing the liability for clients' debts on to the banks.
On Monday, Fiat also announced it had sold its 7.6 percent stake in paper maker Burgo, booking a two million euro capital gain, in a bid to "better focus on our core business".
Fiat makes about 40 percent of its revenues from Fiat Auto but car sales have slumped this year and could drag the once-great icon of Italian industry to a net loss of 1.4 billion euros, according to Multex Global Estimates.
Fiat hopes that laying off about 15,000 workers in the last 12 months -- with another 2,000 due to leave when it stops making its 22-year-old Panda car next year -- should help it cut costs by one billion euros in 2003.
It also plans to invest 2.6 billion euros in new models, most of them under the Fiat and Alfa Romeo marques.