Carmakers do get hurt when someone calls their cars junk. When Moody’s calls your credit rating junk, then this hurts a lot: It makes financing more expensive, or possibly impossible. Moody’s lowered the credit rating of Fiat and PSA Citroen Peugeot to Ba3 with negative outlook. Translation: This is serious junk, and it might get worse.
In a research note, Citibank analyst Pilip Watkins told investors that “the reasons for the downgrades aren’t likely to be a particular surprise.” The weak European demand and the inability of Fiat and PSA to compensate it with sales abroad are common knowledge. Nevertheless, says Watkins, “such low credit ratings for entities that are heavily reliant on debt market access are a real problem in our view and a disadvantage relative to peers.”
“The bigger threat, in our view, is what might happen to the rating of its Financial Services business Banque PSA that finances c.30% of group auto sales,” writes Citibank. Carmakers have access to cheap money through their captive banking arms. If these banks get downgraded as well, then there are huge problems. “Fiat has already moved its main European FS operations into a joint venture with Credit Agricole under the name of FGA Capital which enjoys a 3-notch rating differential to Fiat,” says the research note. PSA is more exposed. Says the note:
“Moody’s has traditionally retained a 2-notch differential between the ratings of Banque PSA and PSA. If it were to retain this (something that should become clearer over the next few days) then Banque PSA would likely lose its investment grade rating. That would severely compromise its business model, in our view, as we believe it would mean loss of access to short-term money markets which we don’t think could be fully substituted in ABS. It would also likely suggest higher funding costs for unsecured debt further disadvantaging it to peers. Of Banque PSA’s debt at end-H112 of c. €22bn, €3.8bn relates to short-term money market funding. Enabling a wider notching differential between PSA and its FS division we imagine would be difficult to achieve though without giving up some ownership of the FS business (the core of PSA’s value in our view). Some form of state support would also seem problematic too given potential objections from peers and the EU.”
Translation of the last sentence: Should Fiat or PSA get into worse trouble than now, they won’t be bailed out as easily as GM or Chrysler. EU rules forbid such bailouts, and the “peers” in Germany would cry murder should the rules be bent. Fiat has a lot of cash sitting in Chrysler, but can’t access it.