By on October 10, 2012

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.

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11 Comments on “Fiat And PSA Taken Down A Notch By Moody’s, Their Banks Are A Ticking Bomb...”


  • avatar
    L'avventura

    Banque PSA is PSA’s golden goose. Its highly profitable and PSA maintains a 100% stake. This could be devastating for PSA’s recovery.

  • avatar
    Morea

    Why can’t Fiat access the cash they have in Chrysler?

    • 0 avatar
      Bela Barenyi

      Because this “clause” was part of the deal/agreement with Fiat. Fiat is only allowed to access the cash of Chrysler when Fiat owns 100% of Chrysler.

      But, as every lawyer/attorney will tell you, there’s always a way to find a way around this agreement/clause. As far as I know, this clause only stops Fiat from grabbing in Chryslers “piggy bank”, but it does not stop Chrysler from “lending” Fiat money/to give Fiat money in form of a low interest “loan”. Sergio is the CEO of both, Fiat and Chrysler, so it would not a big issue. And I don’t believe that the other majority owner of Chrysler (VEBA) would object, because the other option for Fiat would be to sell Chrysler shares and blackmail the VEBA with the scenario that an other majority owner won’t be as nice as Fiat, so that the only option they (=VEBA) has is to shut up and accept the decision.

      But beside of all that, I’d like to comment on what Bertel says. Bertel says/writes:

      “The weak European demand. and the inability of Fiat and PSA to compensate it with sales abroad are common knowledge.”

      This might apply to PSA, but not 100% to Fiat. Fiat has a market leading position in Brazil and sells more cars in Brazil than in Italy and will reach soon 1 million sold units/cars p.a. in Brazil. Brazil is “abroad”. (Fiat Brazil saved the bacon of Fiat more than one time.)
      Furthermore, Fiat owns ca. 60% of Chrysler and Chrysler has healthy/good sales in US. Beeing the majority owner of Chrysler means that Fiat can “consolidate” the profits and sales of Chrysler. Please correct me if I’m wrong, but aren’t the sales of Chrysler in the US not “sales abroad”? But I think, we should take into account that “Moody’s” is an US company and it’s common knowledge that the geographical knowledge of US Americans is… let’s say… improvable.

      Finally, what everybody ingnores: Fiat sits on a cash pile of 10 billion Euro. Why would Fiat need to get “additional” money?
      Sergio’s main goal at the moment is to “preserve cash and liquidity”. That’s the reason why Sergio stopped/postponed investments in Europe, like the development of the next Fiat Punto.
      A lot of people (mainly stupid financial analysts) criticise Sergio for these decisions (=preserving cash by cutting investments) and the same stupid people have the chutzpah to “downgrade” Fiat, despite the fact that Fiat preserves cash.

      I have the impression, especially in the last months, that a lot of people (especially some people who reside in a certain tall building in Wolfsburg/Germany) just sit all the day at their desks playing Solitaire and hoping that Fiat goes bankcrupt. There’s a word for this behaviour…obsession (not regarding Solitaire, but regarding the hope that a certain competitor goes bankcrupt).

      • 0 avatar
        NMGOM

        Wow, Bela….

        Thanks for the very thorough and balanced teaching. Good comment. I, too, thought the Fiat downgrading was bit naive and unwarranted, since that is also, by default, a Chrysler down-grade! And that is just plain silly, frankly.

        You mentioned: “But I think, we should take into account that “Moody’s” is an US company and it’s common knowledge that the geographical knowledge of US Americans is… let’s say… improvable.”

        I agree. Having spent multiple “tours” in Europe, we Americans do have insufficient appreciation for what goes on world-wide — really and deeply, in both political and economic realms. I guess you just have to spend time living overseas to acquire that. The ocean-separation still exits mentally….

        ————-

      • 0 avatar
        th009

        Neither Chrysler or Fiat is actually sitting on a debt-free cash pile.

        Fiat has EUR 10.2M in cash and short-term securities but has 16.6M debt. (The numbers for Chrysler are EUR 9.6M in cash and 10.5M in debt.) A significant amount of cash is required for ongoing operations so you can’t just drain it. Payables alone add up to $18M for the two companies.

        In comparison: GM has $34M in cash and securities, and $30M in payables and short-term debt.

  • avatar
    hubcap

    This is not a comment on Fiat’s cash or lack therof. I’m just wondering, giving Moody’s (and other rating agencies histories), how they can be trusted.

    Talkin’ about a gangsta lean.

  • avatar
    jimboy

    And let’s not forget that Moody’s and other similar agencies are wrong as often as they are right. It seems to me that many of these people predicted the ‘death’ of Chrysler several times, and yet, here it is today, making good profits.

  • avatar
    Bela Barenyi

    @NMGOM:

    I didn’t want to offend anyone, but I’m fed up with a lot of people who take every stupid judgement of the three big rating agencies as
    gospel/at face value instead taking it with a pinch of salt.
    Rating agencies are subject to conflict of interests, just stupidly extrapolate from recent/past developments and assume that the future will be like the recent past, base everything on “expectations” (which is very subjective) and completly ignore the fact that their judgements fuel “self-fulfilling prophecies” (you downgrade a company, the company in question has to pay higher interest rates, the company’s cost of capital increases, higher cost of capital affects the profit, the profit decreases or in in the worst case leads to a (bigger) loss and this again affects everybody’s expectations regarding the future prospects (read: profits/losses) of the company in question).
    (Before someone doubts my remarks: I hold a Master’s Degree in Economic Science (majored in Accounting and Audit, Banking and Finance, Money and International Finance) and a Master’s Degree in Fiscal Affairs (finished both degrees at universities in Germany).

    @th009:
    Nobody said that Chrysler and Fiat are “debt-free”, but having debts or not is not the most important point. The most important question is whether a company is able finance the ongoing operations or to put it differently: whether the a company’s business generates enough positive cash-flow to finance the company’s ongoing operations. And preserving cash is nothing more than reducing “cash outflows”. As long as Fiat and Chrysler can service their debts everything is fine and so far nobody questions Fiat’s or Chrysler’s ability to service their debts.

    • 0 avatar
      th009

      @Bela, I didn’t say that they couldn’t service their debts: they certainly can, at least for now.

      But there isn’t this magical “pile of cash” that they could just dip into for some heavy-duty shopping, for example. If they had EUR 10M in actual spare cash, and positive cash flow, they wouldn’t be getting a bond rating downgrade, either. But they don’t, and they did.

      And that’s before even thinking about the long-term impact of cancelling investments in new product.

    • 0 avatar
      NMGOM

      Thanks again, Bela….

      I appreciate your taking the time to look into this. And I gather from your initial comments above that you were “loaded for bear” on this topic! (^_^)…

      You hit the key Issue: self-fulfilling prophesy from a credit downgrade. I’d sure hate to see Chrysler get hurt right now that they’re bouncing back so vigorously, especially with the Dart, SRT Viper, 300, and new Ram 1500.

      ———-


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