MILAN (Reuters) -- Moody's cut Fiat's rating to 'B1' from 'Ba3' on Tuesday, citing weak 2013 results and challenges it sees for the Italian carmaker in achieving its guidance this year, given eroding profitability in its Latin American market.
A 'B1' rating is four notches below investment grade, making it more expensive for Fiat to raise much-needed financing to turn around its loss-making European operations.
The ratings agency placed Fiat's rating under review for a possible downgrade in early January, just days after the company struck a $4.35 billion deal to take full control of its U.S. unit Chrysler.
"We have downgraded Fiat's ratings following its weaker-than-expected performance in fiscal year 2013 and our view that the company faces significant challenges in terms of achieving its outlook guidance for the current fiscal year," Falk Frey, Moody's lead analyst for Fiat, said in a statement.
"We are also concerned that Fiat may not be able to offset any further profitability deterioration in its Latin American operation through anticipated improvements in other regions and in its luxury and performance division," Frey added.
Despite the tie-up between Fiat and Chrysler already being completed, Moody's said it would keep its ratings on the two companies separate for the time being. The outlook on all Fiat's ratings has improved to stable from negative, it said.
Fiat has cut its 2014 profit forecast after an 80-percent slump in Latin American core earnings in the final quarter of last year. Besides Chrysler, the Latin American region -- and in particular Brazil -- was one of the group's main profit centers that helped offset continuous losses in Europe.
The group's results were hit by an end to car sales incentives in Brazil, higher input costs, currency effects and a cooling off of Latin American economies.
Brazil used to account for about one fifth of Fiat profits, and the sudden and sharp slowdown in the region has analysts worried that the decline may now be structural.
Fiat merged with Chrysler to create the world's seventh-largest auto group, also hoping to use the U.S. firm's cash pool to revamp its loss-making operations in Europe. Moody's said Fiat's access to that cash was constrained in the short term given the U.S. firm's existing credit and bond agreements.
The car group's overreliance on a weak European market, rising price pressures, an overcapacity in its home market in Italy and the lack of any major new volume model launch this year also contributed to the ratings downgrade, Moody's added.
Standard & Poor's last month confirmed its 'BB-' rating on the Italian automaker's long-term debt, keeping its outlook stable. Fitch Ratings said the Chrysler deal had no immediate impact on the automaker's ratings, but added that a full rating review would be conducted in early 2014.