(Updates throughout with Fiat comment, background, details)
NEW YORK, Dec 23 (Reuters) - Moody's Investors Service on Monday cut Fiat's debt ratings to junk status, affecting about $15 billion of debt, saying Italy's largest automaker suffers from weak operating performance and a high debt load.
While Fiat's debt had long been trading at below-investment grade levels, the downgrade still represented one of the gravest setbacks yet for the struggling group, which in recent days had been on an asset-selling blitz to cut a stubbornly high debt burden.
Fiat said in a statement that Moody's move was "surprising" and said it "appeared unjustified with respect to the group's true economic situation."
Companies cut to "junk" grade face a sharp rise in borrowing costs and reduced access to the capital markets, as the universe of investors prepared to buy risky high-yield debt is much smaller than that for investment-grade assets.
But Fiat said recent steps it has taken to strengthen its finances -- including a sale of its six percent stake in U.S. partner General Motors and a sale of a controlling stake in customer financing unit Fidis -- will allow it to deal with the current situation "without particular problems."
The credit rating agency cut Fiat's senior unsecured debt ratings one notch to "Ba1," its highest junk grade, from "Baa3," and its short-term debt ratings to "Not Prime" from "Prime-3." It said its outlook is "negative," meaning another cut is more likely than an upgrade. Fiat is based in Turin.
Moody's said Fiat is unlikely to warrant an investment-grade rating even if it disposes its remaining 80 percent stake in cash-burning Fiat Auto to GM by early 2004. Fiat said on Friday it sold its nearly six percent stake in GM, which it swapped for 20 percent of Fiat Auto in 2000, for $1.16 billion.
A GM spokeswoman had no comment on the downgrade.
Earlier on Monday, analyst Virginie Casin of Standard & Poor's said that rating agency should decide whether to cut Fiat to junk status by the end of January.
Fiat has been struggling all year to avoid a threatened downgrade from the two main ratings agencies, lining up a three billion euro financing package from key creditor banks and committing itself to strict debt reduction targets.
It was unclear what impact the downgrade would have on Fiat's ties with the banks, which have an option to convert the loan under certain conditions. The main banks, IntesaBci , Sanpaolo IMI could not immediately be reached for comment.
The downgrade put the finishing touch on an annus horribilis in which the once proud symbol of Italy's industrial might set off a political firestorm by drawing up plans to lay off thousands of autoworkers as it sought to reverse what is expected to be a 1.2 billion euro operating loss this year.
Fiat, whose shares are off 54 percent this year, has seen its share of the Italian auto market drop to record lows this year as its Fiat, Alfa Romeo and Lancia car models have had trouble attracting buyers.