Peugeot rated 'junk' as debt climbs and sales stall

PSA Peugeot Citreon

, the second largest European automaker, had shares cut to junk status by Moody's Investor Services after the company announced an alliance with General Motors

and the issue of 1 billion euro of stock, about $1.34 billion. General Motors, the world's largest auto maker, will be the second largest share holder in the company, behind the Peugeot family, after acquiring a 7% stake. The two companies said they may save as much as $2 billion annually through the alliance. The move was not enough to reassure markets or analysts as the stock dropped as much as 7.7%. "Past mergers and alliances in the automotive industry have often not resulted in the anticipated competitive advantage and improved performance," Moody's said in the note, downgrading long-term debt from Ba1 to Baa3. General Motors, which is 32% government-owned, reported $750 million in losses in European cars in 2011, half what it lost in 2010. Peugeot has struggled with lower numbers of new car sales, as the company reported a 29% decrease in registrations in February from February 2011. Registrations of new cars in France fell 20% for the same time period. Sales last year were higher as buyers took advantage of a government car scrapping deal. Automotive executives predict further declines in sales as European consumers wait for clarity on the regions debt crisis. The 621 million euro earnings from Peugeot's car-manufacturing unit a year earlier were not repeated as the company reported a 92 million euro, about $123 million, loss for the unit which builds the Peugeot 208 hatchback and Citroen C4 sedan. Net debt at the company rose to 3.4 billion euros, more than twice what it was six months earlier, the company said in a statement earlier this month.