Standard & Poor's on Thursday cut its ratings on PSA Peugeot Citroen into junk territory, citing an expectation that low demand will hurt the French automaker's already weak profitability.
S&P cut Peugeot's corporate credit rating one notch to BB-plus, one step below investment grade, and gave the company a negative outlook, indicating an additional cut may be likely over the next one to two years.
A downgrade into junk territory can significantly increase a company's borrowing costs.
Weakness in European auto demand is likely to persist in 2010, said S&P, which had previously expected a market recovery.
"We believe that the timing of the economic recovery in Europe is likely to be delayed, and that the positive effect of the various government incentives on car sales in 2009 will probably have negative consequences for 2010 sales," S&P said in a statement.
As a result, "Peugeot's profitability and financial profile will deteriorate significantly," S&P said.
Separately, S&P said it is no longer reviewing Fiat's ratings for downgrade, saying it expects the Italian automaker to continue to make progress in improving its liquidity.
S&P also rates Fiat BB-plus with a negative outlook.
