DBRS Confirms PSA Peugeot Citroen at BBB (low) with a Negative Trend

DBRS has today confirmed the Senior Unsecured Debt rating of PSA Peugeot Citroen (PSA or the Company) at BBB (low) with a Negative trend. The rating confirmation is reflective of the Company’s sound business profile as the second largest auto manufacturer in Europe, with a leading regional position in light commercial vehicles (LCVs), and a strong foothold in its native French market. Although DBRS recognizes that recent financial results are weak relative to historical norms, this has already been incorporated in the consecutive downgrades of PSA in 2009. DBRS also notes that, with the worst of the downturn likely passed, the Company’s performance improved progressively through 2009. The confirmation also recognizes the Company’s substantially improved liquidity position as of December 31, 2009. However, the trend on the rating remains Negative because conditions in PSA’s core European market (which typically accounts for more than two-thirds of its automotive sales) remain highly uncertain as vehicle scrappage incentives (which were quite successful in 2009 and, in turn, likely pulled forward considerable demand) are being phased out in certain markets, with the fiscal challenges of certain member nations also possibly undermining economic growth in the near term.

In 2009, the Company incurred an operating loss (for the second consecutive year) that was substantially higher than in 2008 due to lower volumes and negative pricing effects (foreign exchange headwinds represented a further significant negative factor). DBRS recognizes that PSA’s financial profile remains weak for the assigned rating. However, DBRS also notes that the Company’s performance was materially better in the second half of 2009 (as demonstrated by improved credit metrics – debt-to-EBITDA, as calculated by DBRS, was 4.0 times in H2 2009 vis-à-vis 8.2 times in H1 2009). This is due to the considerably narrowed losses of the automotive operations, with the Company reverting to profitability on a consolidated basis largely as a result of earnings in the financial services segment, which has been resilient to the economic downturn.

DBRS notes that the automotive operations achieved market share gains through 2009. This is attributable to two main factors. Firstly, the Company’s product portfolio is typically strongest in the small-car segment, which benefited the most from Europe’s vehicle scrappage incentive programs. Secondly, PSA is currently in the midst of significantly freshening its model line-up (which now includes new models in the crossover vehicle segment, which was previously underrepresented by the Company), with the stronger product offerings also helping market share.

More significantly, the Company generated substantial net free cash flow in 2009, which is primarily due to sound working capital management as PSA sharply lowered inventory levels. Accordingly, net debt levels of the industrial operations were materially reduced to EUR 2.8 billion as of year-end 2009 (vis-à-vis EUR 3.8 billion in 2008). Additionally, the Company’s liquidity position has been substantially bolstered through several new financings that totalled in excess of EUR 4.5 billion (the most significant of which was the five-year French state loan of EUR 3 billion). As a result, DBRS considers PSA’s liquidity over the medium term to be sufficient to absorb additional losses should the European market decline further.

The Company recognizes that its operating margins remain well below those of industry leaders, with PSA announcing a plan targeting a EUR 3.3 billion improvement in EBIT from 2010 through 2012. (DBRS notes, however, that the plan assumes ongoing market share gains over the medium term as well as significant improvements in emerging markets; currently, PSA’s sales remain overweighted in Europe.) PSA is also attempting to address its relatively small global scale (approximately 50% and 35% the size of Volkswagen AG and Toyota Motor Corporation, respectively) through cooperative agreements and/or alliances with other original equipment manufacturers. The most notable of these involves increasing collaboration with Mitsubishi Motors Corporation (Mitsubishi), although the Company recently precluded a capital investment in Mitsubishi, deeming it not appropriate in the current circumstances.

The trend on the rating could be changed to Stable in the event that PSA’s automotive operations revert to sustained profitability when its core European market stabilizes in 2010 and onward. However, should the European market deteriorate further amid economic challenges and the Company incur additional losses, thereby further increasing debt levels, a negative rating action could result.

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

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