LONDON -- Standard & Poor's on Monday lifted its rating outlook on Italian automaker Fiat SpA to stable from negative while affirming the company's long-term rating at BB-, three notches below investment grade.
"The change in outlook reflects Fiat's much-improved financial flexibility and our expectation that its automotive activities will gradually recover, although they will remain loss-making in 2005," said S&P credit analyst Nicolas Baudouin.
Three transactions -- a payment from General Motors to settle a disputed put option, the conversion of a 3 billion euro ($3.6 billion) loan into shares and the sale of Iveco's captive finance arm -- have boosted financial flexibility, the ratings agency said in a statement.
However, the ratings still incorporate the weak market position of Fiat Auto, which has still not achieved breakeven and operates in an increasingly competitive environment, S&P said.
The cost of insuring against a default by Fiat fell after S&P's decision, a trader in London said, with five-year default swaps 10 basis points lower on the day at 425 basis points on a mid-price basis. The price means it costs 425,000 euros a year to insure 10 million euros of the group's debt against default.
The price fell around 40 basis points last week, the trader said, after the group reported second-quarter results that were much better than expectations.
Fiat last week said trading losses at its core car unit were 88 million euros in the second quarter, versus a forecast by 10 analysts polled by Reuters of a loss of 144 million euros.
S&P said it expected Fiat Auto's profitability to improve as suggested by the sharp reduction in losses in the second quarter.
It said free cash-flow was expected to be close to zero in 2005 thanks to the settlement with GM, while the situation in 2006 would be "even better", with positive free cash-flows even in the absence of exceptional in-flows.
However, it said the group's recovery continued to depend on the success of new car launches. In September, the car group will launch the new version of its best-selling Punto.
Fiat still has negative outlooks from the other two major ratings agencies. Moody's Investors Service rates the company at Ba3, while Fitch Ratings assigns a rating of BB-, both also three notches below investment grade.