DBRS Confirms PSA Peugeot, Changes Trend from Negative to Stable

DBRS has today confirmed the Senior Unsecured Debt rating of PSA Peugeot Citroen (PSA or the Company) at BBB (low). The trend on the rating has been changed to Stable from Negative. This trend change reflects PSA’s significantly stronger operating performance in 2010, with the Company’s financial profile progressively reverting to levels commensurate with the assigned rating. DBRS notes that the improvement, while incorporating volume increases from market share gains and a moderate recovery in industry conditions, is significantly attributable to substantial cost reductions and efficiencies (i.e., in excess of EUR 1.1 billion) achieved by the Company. Additional positive factors include firmer pricing and a stronger product mix, given higher sales in the C and D vehicle segments. DBRS also notes that PSA made notable progress in the geographic diversification of its revenues. Therefore, while the outlook over the near term in the Company’s core European market remains lacklustre given economic headwinds amid the ongoing fiscal challenges of various member nations, DBRS expects PSA’s performance and credit metrics to continue tracking positively going forward. The rating remains underpinned by 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.

PSA’s 2010 recurring operating profit for the industrial operations totalled EUR1.3 billion (vis-à-vis losses incurred in 2009 in line with the automotive downturn). In addition to the cost savings and higher volumes, earnings were bolstered by positive foreign exchange effects and a favourable product mix, which has strengthened with new models such as the Peugeot RCZ and 3008, as well as the Citroën DS3. These distinctive products accounted for 9% of automotive sales in the first quarter of 2011 and will increase going forward, supported by the launch of the Citroën DS4 and DS5 this year. Together with the launch of the Peugeot 508, the C and D segments are expected to represent 44% of 2011 sales.

Recognizing that its margins were consistently below industry averages, the Company announced last year a Performance Plan targeting a EUR 3.3 billion (cumulative) improvement in EBIT for its automobile segment from 2010 through 2012. DBRS notes that PSA effectively exceeded its 2010 objectives, with the Performance Plan being revised accordingly and the projected improvement in EBIT raised to EUR 3.7 billion.

Additionally, PSA’s reliance on its core European market has materially lessened, with sales outside Europe amounting to 39% of total volumes vis-à-vis 32% in 2009. Through 2015, the Company aims to have 50% of total volumes sold outside Europe. DBRS considers PSA’s Performance Plan and geographic sales diversification targets ambitious but possibly attainable in light of the progress demonstrated in 2010 and given the significantly higher projected growth rates of emerging markets going forward.

In addition to the core automobile division, the Company’s performance was bolstered by improving results across all segments. Banque PSA Finance in 2010 continued its consistent track record of profitability (which persisted throughout the automotive downturn), with very solid operating margins. Similar to the automobile segment, Faurecia (automotive equipment) also achieved a significant turnaround on higher volumes, with results further benefiting from recent acquisitions that also contributed to and materially increased Faurecia’s scale.

PSA’s 2010 results have significantly strengthened its financial profile. DBRS notes that cash flow and coverage metrics have reverted to levels consistent with the assigned rating. While leverage, in terms of gross debt-to-total capitalization, remains slightly elevated, this is explained by PSA’s desire to maintain high liquidity levels as a function of the recent financial crisis. The Company’s net debt-to-total capitalization as of year-end 2010 stood at 13% (as calculated by DBRS), which is well acceptable for the rating. Going forward, DBRS expects PSA to progressively reduce its indebtedness, with the Company repaying in full (as of April 26, 2011) its French state loan (of an initial amount of EUR 3.0 billion and which originally was to mature in 2014).

DBRS expects the ratings to be constant over the near to medium term. While conditions in the Company’s core European market remain uncertain, this should be more than offset by projected efficiencies, supplemented by ongoing growth in emerging markets. However, in the event that volumes in Europe contract sharply and place material downward pressure on PSA’s earnings, this could potentially have negative rating implications.

Notes:
All amounts are in euros unless otherwise indicated.

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