DBRS Downgrades PSA Peugeot Citroën to BB (high), Trend Negative

DBRS has today downgraded the Senior Unsecured Debt rating of PSA Peugeot Citroën (PSA or the Company) to BB (high) from BBB (low). The trend on the rating remains Negative. The rating action reflects the following issues confronting the Company:

-- Significant contraction in the European automotive market, particularly PSA’s core Southern European markets, primarily attributable to the sovereign debt crisis, with difficult conditions expected to persist over the short-term;
-- European market share decline, partly due to the Company’s unfavourable country and segment mix;
-- Ongoing declines in the Company’s European capacity utilization, which was reduced to 76% in the first half of 2012 (vis-à-vis a level of 91% in the first half of 2012); and
-- Associated material losses and cash burn of the Company.

In line with the above, several of the Company’s credit metrics (particularly income- and cash flow-based measures) have deteriorated to levels no longer commensurate with the previous rating. While DBRS acknowledges that the Company has announced several countermeasures in response to the above challenges, DBRS notes that these remain subject to successful completion, with significant benefits (apart from asset disposal proceeds) not likely to be achieved in the near term, and PSA not expecting to generate positive free cash flow until 2014. Concurrent with the downgrade and pursuant to DBRS’s Rating Methodology for Leveraged Finance, DBRS has assigned an Issuer Rating of BB (high) to the Company, with associated recovery and instrument ratings of PSA’s Senior Unsecured Debt being assessed at RR4 and BB (high), respectively. With this rating action, PSA is removed from Under Review with Negative Implications, where it was placed on July 13, 2012.

The Company recently announced its first half 2012 results, which reflect an ongoing deterioration in PSA’s financial performance following the first half of 2011. Worldwide unit sales (including complete knock-down units) amounted to 1.6 million units, which represented a decline of 13% year-over-year. Sales in the Company’s core European market dropped by 15%, with volumes outside Europe also decreasing by 10% (vis-à-vis the first half of 2011). The core automotive division incurred a recurring operating loss of EUR 662 million (as reported by PSA); this was only partly offset by ongoing profitability of Banque PSA Finance (sales financing) and majority-owned Faurecia (automotive components). Over the six- and 12-month periods ending June 30, 2012, PSA’s industrial operations have generated negative free cash flow in the amounts of EUR 400 million and EUR 1.3 billion (as calculated by DBRS), respectively.

DBRS notes that the Company remains highly dependent on Europe, which represented roughly 60% of PSA’s total unit sales through the first six months of 2012. PSA’s regional country mix is also unfavourable, with its core markets, such as France, Italy and Spain, being among those notably impacted by the continent’s sovereign debt crisis. The Company is also highly exposed from a manufacturing perspective to France, which is estimated to account for close to 60% of PSA’s total automotive production. Europe’s automotive industry remains burdened by significant structural overcapacity that has been exacerbated by the sharp drop in demand over the past year, with a meaningful recovery not expected until at least 2014.

In response to the above, the Company has undertaken several initiatives to help mitigate its cash burn. These include targeted cost reductions of approximately EUR 1 billion for 2012 and planned asset disposals of roughly EUR 1.5 billion that include the forthcoming sale of a majority stake in its GEFCO (automotive logistics) subsidiary. In July, the Company announced the planned closure of automotive production in its Aulnay plant, future production adjustments at its Rennes facility along with other corporate and manufacturing staff reductions that are in total projected to amount to an approximate reduction of 8,000 employees. The Company is currently in the midst of a product offensive (including the recent launch of the Peugeot 208) to improve PSA’s product cadence and stabilize its market share going forward. PSA also announced earlier this year a strategic alliance with General Motors Company (GM) aimed at deriving efficiencies through joined global purchasing, as well as efficiencies in capital expenditures and research & development expenses through the sharing of platforms, components and modules with respect to future vehicle development. While the alliance with GM is not expected to generate material benefits prior to 2014, GM was also the main participant in PSA’s recent equity offering that generated proceeds of approximately EUR 1 billion for the Company.

Bolstered by the above cited activities, DBRS notes that PSA’s liquidity position remains manageable. Cash balances of the industrial operations, as of June 30, 2012, totalled EUR 7.6 billion, with Company’s EUR 2.4 billion revolving credit facility remaining undrawn. Moreover, PSA’s debt repayment schedule is favourable, with minimal repayments due in 2012 and a weighted-average maturity of 4.5 years.

However, the Negative trend on the rating reflects the severe conditions in the European automotive market that are not expected to improve materially over the near term. Should the Company demonstrate progress in its recovery plan and significantly reduce its level of cash burn (PSA has currently targeted its cash burn in 2013 to be at approximately half of this year’s levels), the trend on the rating could be changed to Stable. However, in the event that the Company’s losses or negative free cash flow persist at levels similar to those incurred recently, this would likely lead to a further negative rating action.

Notes:
All figures are in Euros unless otherwise noted.

The applicable methodology is Rating Companies in the Automotive Industry (April 2011), which can be found on our website under Methodologies.