PSA Peugeot Citroen, Europe’s second-largest carmaker, had its credit rating cut to junk by Moody’s Investor Services, which cited concern about the French company’s deteriorating finances and a jump in net debt.

Peugeot’s long-term debt rating was lowered one grade to Ba1 from Baa3, Moody’s said in a statement Thursday. Shares of the automaker, which Wednesday announced a strategic alliance with General Motors Co., plunged as much as 7.7 percent.

Peugeot’s fiscal year 2011 results were “well below Moody’s expectations,” analyst Falk Frey said in the statement, adding that the downgrade also “incorporates PSA’s challenges to improve its financial metrics over the short-to-medium term following a severe deterioration in 2011, and more important turn around its loss-making core automotive business.”

The car-manufacturing unit, which builds the Peugeot 208 hatchback and Citroen C4 sedan, last month reported a recurring operating loss of 92 million euros ($123 million), compared with a profit of 621 million euros in 2010. Peugeot in February announced plans to sell assets and delay investments as net debt more than doubled in the second half to 3.4 billion euros.

The stock dropped as much as 1.17 euros to 13.88 euros and was trading down 6.7 percent at 14.04 euros as of 2:48 p.m. in Paris. The shares have gained 16 percent this year, valuing the carmaker at 3.28 billion euros.


No GM Link

Peugeot spokesman Jean-Baptiste Mounier said the Moody’s downgrade was linked to an evaluation of its earnings and had nothing to do with Wednesday’s agreement with General Motors.

“There was some uncertainty over our short-term profitability,” Mounier said by telephone from Paris. “It’s therefore clearly not related to the recent alliance. Agencies take into account the difficulties in the European market.”

Peugeot said Wednesday that GM, the world’s largest automaker, will buy a 7 percent stake to become the second- largest shareholder after the Peugeot family as part of a broad strategic alliance. The French company will also sell new shares in a 1 billion-euro rights offering.

“Though Moody’s recognizes that the announced management initiatives, including the capital increase, will provide the company some time to implement operational improvement measures and reap some benefits, the negative outlook reflects the risks of a more negative light vehicle demand in Europe, and especially in PSA’s core markets,” Frey said.

Automotive executives have forecast that European car sales will decline in 2012 for the fifth straight year as consumers hold back purchases amid concerns about the region’s sovereign debt crisis. (Bloomberg)