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(Adds details from S&P report)
PARIS, Jan 17 (Reuters) - Standard & Poor's has placed the debt of French retailer Casino on credit watch, with negative implications, citing weakness in Brazil and high debt.
The credit rating agency said in a report that it had placed Casino's long-term 'BBB-' and short-term "A3" debt ratings on credit watch, saying it might lower the long-term ratings "by no more than two notches".
"Notwithstanding management's plans to sell assets to reduce debt at the Casino level, the group's profitability will continue to be fairly weak for an extended period of time and its debt levels, primarily located at the French operations, too high," S&P said.
With its long-term debt rating already one rung above junk status, a downgrade would cut it to non-investment grade, which would mean some big institutional investors would not be able to hold its debt.
Casino had no immediate comment.
S&P's warning comes as another blow for Casino, which has been in the crosshairs of Muddy Waters since December when the research and investment firm said the retailer was "dangerously leveraged", used financial engineering to mask a deteriorating core business, and was only managed for the short term.
Muddy Waters had put a value of 6.91 euros on Casino shares, prompting the worst slide in Casino's stock in years. . The stock closed at 40 euros on Jan. 15.
S&P said that some of the benefits of a deleveraging plan now under way could be "materially diluted by the severe and prolonged weakness in Brazil", while poor trading conditions in Asia added to Casino's woes.
Casino, which controls Brazil's largest retailer Grupo Pao de Acucar and makes about 40 percent of its revenue in Brazil, has suffered from the Brazilian real's weakness and from exposure to consumer electronics, a sector particularly hard hit by the recession.
On Jan. 14, Casino posted fourth-quarter sales that beat expectations as a recovery in France gained pace. But its shares fell sharply as it was unable to restore investor confidence about its earnings momentum and about Brazil.
It also surprised investors by saying it now also planned to sell its 58.6 percent stake in Thai hypermarket operator Big C , worth $2.6 billion.
In December, Casino had announced a 2 billion euro ($2.18 billion) deleveraging plan aimed at substantially reducing its debt, which stood at 7.55 billion euros at end-2014, by the end of this year.
S&P said it would focus its review on operating prospects for the group in Brazil and Asia in 2016 and 2017, profitability in France, and the deleveraging plan.
It would also re-evaluate the impact of Casino's ownership by leveraged parent Rallye, which S&P said "further restricts Casino's financial flexibility given the need to upstream dividends to service Rallye's net debt".
Rallye owns 48.4 percent of Casino and depends on dividends from Casino to service its 2.4 billion of net debt. Rallye's majority shareholder is Fonciere Euris, which in turn is owned by Finatis, both of which also have their own debt to service. (Reporting by Dominique Vidalon; Editing by Kevin Liffey)