Credit ratings agency Moody's is reviewing Fiat’s Ba3 rating for a possible downgrade to reflect the impact of the carmaker’s plan to fully acquire Chrysler Group on its cash position. "The announced acquisition will materially weaken Fiat's liquidity position at a time when the company is still free cash flow negative," Moody's senior vice president and lead Fiat analyst Falk Frey said in a statement.
Moody's classifies the "Ba" level as speculative, below investment grade. Moody’s had downgraded Fiat's rating to Ba3 -- three levels below investment grade -- in October 2012 during the European economic slump. Fiat reached an agreement on Jan. 1, 2014 to acquire the 41.46-percent stake in Chrysler it does not already own from a UAW’s retiree healthcare trust for $4.35 billion. The deal is expected to be finalized on or before Jan. 20.
The agreement is expected to further facilitate integration of the financial and operating strategies of Fiat and Chrysler, Moody's said. While Chrysler is the source of earning for Fiat at the time when vehicle sales in Europe is weak, the two carmakers are forced to manage their finances separately. Moody's said that Fiat's remaining cash, its unused credit facilities and its operating cash flow should be enough to meet its cash needs in 2014.
Fiat has issued a statement disclosing that Moody's had placed its rating under review for a possible downgrade. Moody's said it would look at the impact of increasing challenges in Latin America on Fiat's ability to generate cash. Fiat's performance in the country has worsened considerably since 2011 due to increased competition. "Fiat's ability to compensate for the sluggish demand in Italy has diminished further," Moody’s said.