PSA Peugeot Citroën’s debt rating has been downgraded to junk status by Moody’s Investors Service a day after it unveiled a manufacturing and purchasing alliance with General Motors.

The cut yesterday came as car sales data in France underlined the near-term challenges faced by the two carmakers. Registrations of light vehicles in Peugeot’s home country of France dropped 18 per cent year on year in February, the industry association CCFA reported.

Peugeot and GM’s Opel unit reported two of the sharpest slides in registrations of all big carmakers, down 25 per cent and 29 per cent respectively.

Peugeot and GM said on Wednesday they planned to develop cars, components and modules together and create a joint purchasing organisation, delivering each company about€750m of synergies within five years.

To help finance its share, Peugeot would issue €1bn in new shares to GM and its existing shareholders, led by the Peugeot family, as soon as next Tuesday, two people close to the situation said.

GM will subscribe to about a third of the issue and take a 7 per cent stake in the French group.

The rights issue will be underwritten and arranged by Morgan Stanley, BNP Paribas, and Société Générale. Peugeot shares dropped 3.86 per cent as Moody’s downgraded its debt to Ba1 from Baa3, with a negative outlook, saying it faced “tremendous operational stress” and warning the GM tie-up would incur upfront expenses that could have a negative effect on results in the short term.

“Moody’s notes past alliances in the automotive industry have often not resulted in the anticipated competitive advantage and improved performance,” the agency said.

It put Peugeot’s ratings on watch last month after the group said it had burned through €1.6 billion of cash and added €2.2 billion to net debt in 2011.

Industry analysts gave the tie-up mixed reviews. – (Copyright the The Financial Times)