Aug. 7 (Bloomberg) -- PSA Peugeot Citroen, Europe’s second-largest carmaker, had its debt rating lowered to junk by Standard & Poor’s, which cited the company’s deteriorating profitability.

The rating was cut to “BB+” from “BBB-,” with a “negative” outlook, the credit agency said in a statement yesterday. A recovery in demand in the European car market will likely be delayed beyond 2010, Standard & Poor’s said.

“Peugeot’s profitability and financial profile will deteriorate significantly owing to the prolonged weakness in European auto demand, which we now anticipate will persist in 2010 in contrast to our previous assumption of a market recovery,” S&P said in the statement.

The downgrade comes less than a month after Peugeot got 1.5 billion euros ($2.2 billion) of two-year loans from a group of 12 international banks in the form of a revolving credit, a facility in which money can be borrowed again once it’s repaid. It’s also receiving a 420 million-euro three-year loan from the French government’s Societe de Financement de L’Economie Francaise.

The Paris-based company said in June it may have an operating loss of as much as 2 billion euros this year. Sales of cars and light trucks slumped 14 percent in the first half, while Peugeot’s net loss reached 962 million euros.

With Peugeot’s high exposure to Europe, “low demand prospects will likely continue to weigh on its already weak profitability,” Standard & Poor’s said. “The negative outlook reflects our opinion that Peugeot’s financial profile will not stabilize in line with the ‘BB+’ rating before 2011.”

In June, S&P cut its debt rating on rival Renault SA by two steps to BB, or one level lower than Peugeot’s new rating.

To contact the reporter on this story: Tommy Stubbington in London tstubbington@bloomberg.net.

Last Updated: August 6, 2009 18:15 EDT