Fiat May Have Staved Off Credit Downgrade

MILAN, Italy December 22, 2002; The AP reported that Fiat SpA appears to have staved off a credit downgrade with the sale of its 5.1 percent stake in General Motors Corp. and a 51 percent stake in its Fidis consumer finance arm.

But while the injection of cash allows the Italian conglomerate to meet key debt-reduction targets without the sale of any of its corporate jewels, Fiat's avoidance of junk status still hinges on the performance of its core auto business.

Fiat's sale Friday of its 32 million GM shares to Merrill Lynch brought in $1.16 billion, and it expects another 350 to 400 million euros ($359 million to $410 million) from the sale to its creditor banks of Fidis, its consumer finance arm.

That comes on top of a deal during the autumn in which it raised 1.15 billion euros ($1.15 billion) by monetizing a put option to sell its 24.6 percent stake in energy consortium Italenergia SpA, owner of power company Edison SpA, to Electricite de France.

Combined, those proceeds should allow Fiat to cut its net debt below the 3.6 billion euro ($3.6 billion) level agreed with its four chief creditors, who otherwise could trigger a conversion clause and exchange a 3 billion euro ($3.1 billion) loan for equity. That would eclipse the Agnelli family as 103-year-old Turin-based Fiat's largest shareholders.

The banks — IntesaBci SpA, Sanpaolo IMI, UniCredito Italiano SpA and Capitalia SpA — are eager to avoid that conversion, and reportedly hailed Fiat's move to sell its GM stake.

The banks had been pressing Fiat to dispose of assets, but most analysts assumed the first to go would be either profitable avionics unit Fiat Avio or wholly owned insurance subsidiary Toro SpA.

Fiat acquired 32 million shares from GM in what was described as a ``historic'' deal in 2000, in exchange for 20 percent of its own auto unit and a put option to sell the rest starting in 2004. Selling the stake ``will have no impact on the industrial relationships or contractual arrangements between Fiat and GM,'' Fiat said late Friday.

While Fiat's balance sheet appears set to comply with its creditors' demands, the reprieve may be short lived. Operations at the ailing auto unit may prove decisive.

Unprofitable in eight of the last nine years, it lost 1.3 billion euros ($1.4 billion) in the first nine months of 2002. That effectively consumed the 775 million euros ($796 million) Fiat raised by selling a 34 percent stake in Ferrari SpA to Mediobanca SpA over the summer, and prompted a 2.5 billion euro ($2.6 billion) capital increase — funded by intra-group credit — earlier this month.

Fiat Auto is shedding about 20 percent of its Italian work force, sparking protests and political turmoil at home.

Fiat Auto Chief Executive Giancarlo Boschetti said at a motor show earlier this month that his division expected to break even operationally in the second half of 2003, raising questions about the company's earlier claims the unit would not lose more money — barring restructuring charges — this year.