DBRS Downgrades PSA Peugeot - Changes Trend to Negative

DBRS has today downgraded the Senior Unsecured Debt rating for PSA Peugeot Citroën (PSA or the Company) to BBB from BBB (high). DBRS has also changed the trend to Negative from Stable. The rating action reflects the Company’s weak operating results and sharp increase in debt levels over the past six months attributable to highly deteriorating market conditions. The increase in leverage is greater than that anticipated by DBRS. Furthermore, the rating action incorporates the Company’s expectation that debt levels will continue to increase significantly further in 2009, resulting in credit protection measures that are no longer commensurate with PSA’s former rating.

DBRS notes that the increased leverage is significantly due to high working capital absorption. The use of working capital in 2008 amounted to a very significant EUR 2.9 billion. DBRS notes that the use of working capital occurred mostly in the second half of year, as the Company’s markets underwent a severe downturn, most notably in Europe where production volumes decreased 26% year-over-year in the fourth quarter. PSA, as with many original equipment manufacturers (OEMs), was unable to react quickly enough to the sudden and striking drop in industry volumes. DBRS notes that despite undertaking significant production cuts, the Company’s inventories as of December nonetheless increased 11% year-over-year.

As a result of the above, PSA’s industrial net debt as of year-end 2008 amounted to EUR 3.8 billion, which represents a significant increase from the EUR 420 million net cash position reported only six months previously. The Company has also indicated that it expects to incur approximately EUR 4 billion in additional indebtedness this year to cover further expected losses; implement the financial restructuring of Faurecia; and support ongoing core capex and R&D requirements. DBRS notes that the added indebtedness results in a financial profile that is no longer consistent with the former BBB (high) rating.

PSA’s liquidity position as of year-end 2008 equalled EUR 2.5 billion, a significant decrease from the EUR 6.7 billion level as of year-end 2007. This notwithstanding, DBRS considers the Company’s liquidity position to be adequate. DBRS notes that the Company’s industrial operations have EUR 1.8 billion in short-term debt, with no significant additional debt maturities until 2011. Additionally, PSA has an undrawn credit line in the amount of EUR 2.4 billion, with the French government also recently providing a five-year EUR 3.0 billion loan that is to be made available this month.

The trend has been changed to Negative from Stable, reflective of the very weak market conditions that are expected to prevail through 2009 and possibly extend well into 2010. In the event that PSA incurs sizeable losses and increases leverage significantly beyond levels that are presently forecasted by the Company; this could have further negative rating implications.

Notes:
All figures are in euros unless otherwise noted.

The applicable methodology is Rating Automotive, which can be found on our web site under Methodologies.

This is a Corporate (Autos & Auto Parts) rating.