DBRS Downgrades PSA Peugeot - Trend Remains Negative

DBRS has today downgraded the Senior Unsecured Debt rating for PSA Peugeot Citroën (PSA or the Company) to BBB (low) from BBB. The downgrade reflects significant losses at the Company’s automotive operations amid weak industry conditions that have caused the Company’s financial profile to deteriorate to a level no longer commensurate with the formerly assigned rating. PSA’s performance in Europe (which typically accounts for 65% of the Company’s sales) this year has been lacklustre, with the Company failing to take sufficient advantage of the vehicle scrappage programs that have been implemented across the continent. The trend remains Negative, as DBRS expects European automotive markets to remain challenging next year as most scrappage programs are phased out.

DBRS notes that the automotive downturn in Europe has been somewhat moderated this year through the implementation of vehicle scrappage programs. Nevertheless, car and light commercial vehicle volumes through the first half of 2009 are down approximately 14% year-over-year. These declining industry volumes and associated negative pricing effects are the two major factors underlying the Company’s H1 2009 operating loss of EUR902 million, relative to an operating profit of EUR633 million generated in the prior-year period. DBRS notes that the vehicle scrappage programs implemented in Europe have proportionately favoured sales of small vehicles, given their increased affordability. PSA, which focuses on the B and C car segments, therefore stood to reap some benefit in terms of market share. However, in spite of modest gains in France and Germany, the Company’s share through the first half of 2009 in Europe was flat both year-over-year and relative to year-end 2008.

The weak operating results amid severe industry conditions have had a highly adverse impact on PSA’s financial profile. As of June 30, 2009, the Company’s leverage (i.e., total debt-to-total capitalization) amounted to 45% relative to 30% as of June 30, 2008. Additionally, while PSA generated positive free cash flow through the fist six months of 2009 (primarily due to cash generated from working capital through aggressive inventory reductions), the Company indicated that this will likely be more than offset in the second half of the year. Furthermore, market conditions in Europe are expected to remain challenging through most of 2010, as no significant economic recovery is forecast. Inherent automotive demand will likely decrease, given the substantial level of sales pulled forward this year by the incentive programs. As such, PSA’s operating performance is expected to remain weak, thereby likely preventing any material improvement in its financial profile over the near to medium term.

DBRS notes that the revised BBB (low) rating reflects PSA’s sound business profile as one of Europe’s major automotive companies with a leading position in its native French market. The Company’s liquidity position remains adequate and has actually improved relative to 2008 year-end levels, with cash balances totalling EUR7.2 billion as of June 30, 2009. In March 2009, the automotive operations received a five-year EUR3 billion loan from the French government to bolster liquidity, with further government support likely if deemed necessary. In addition, DBRS also recognizes that the Company’s debt maturity schedule has improved with the refinancing of bonds due in 2011. However, PSA’s relatively small scale (approximately 50% and 35% the size of Volkswagen AG and Toyota Motor Corporation, respectively) makes it difficult for the Company to compete, given the high cost of developing new vehicles and technology (notwithstanding PSA’s efforts to mitigate this challenge through cooperative agreements/alliances with other original equipment manufacturers).

Forthcoming model launches of the Peugeot 5008 and the Citroën C3 should help PSA defend –and possibly improve – market share over the near term, although sales levels will continue to reflect the significant industry headwinds. Ongoing efficiency programs should also alleviate the expected weak performance. However, the rating could be further lowered in the event that there is significant additional cash burn above currently forecasted levels and debt levels continue to increase unabated.

Notes:
All figures are in euros unless otherwise noted.

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

This is a Corporate rating.