DBRS Confirms PSA Peugeot Citroën at BBB (low), Trend Changed to Negative

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 Negative from Stable. This trend change incorporates PSA’s weaker 2011 consolidated earnings (especially in the second half of the year, which were below DBRS’s expectations) amid ongoing challenging conditions in the European automotive industry. The results primarily reflect the lacklustre performance of the Company’s core automobile segment. Moreover, automotive conditions in the Company’s important European market are expected to remain difficult over the near term, in line with the projected drop in demand (associated with the fiscal burdens of various member nations) amid the industry’s (as well as that of PSA) persistent overcapacity in the region. Notably, conditions in three of the Company’s key markets – Spain, Italy and PSA’s native France – appear particularly challenging.

However, DBRS notes that the weak automobile results were partly offset by PSA’s other business segments. Banque PSA Finance (automotive financing) continued to report solid results while Faurecia (automotive equipment) generated strong earnings; the latter reflecting growth across all its businesses and geographic market segments (on a like-for-like basis), bolstered by numerous recent acquisitions. Accordingly, DBRS observes that PSA’s 2011 consolidated results, while significantly weaker year-over-year, nonetheless remained considerably stronger relative to 2009, when the Company incurred a significant consolidated operating loss as a result of weak performance across all its manufacturing segments. DBRS further notes that most of PSA’s 2011 credit metrics exhibited little change year-over-year and remain commensurate with the assigned rating.

The 2011 loss in the core automobile segment reflected lower volumes and negative pricing effects, as well as higher raw material costs, which together exceeded the Company’s ongoing efficiency initiatives. The drop in total volumes was primarily a function of reduced unit sales in Europe, where declining industry levels were exacerbated by PSA market share losses. The loss of share was concentrated in the B vehicle segment, with some of the Company’s core models (such as the Peugeot 206 & 207) approaching the end of their product lifecycle and the launch of the successor model not due until the spring of 2012; (upon which PSA is expected to begin recovering its lost share). The share loss in the B vehicle segment was partly offset by gains recorded in higher vehicle segments attributable to recent product launches, such as the Peugeot 508 and the Citroën C4. This reflects the Company’s efforts to increase the relative proportion of premium vehicle sales and enhance the image of its Peugeot and Citroën brands, although DBRS notes that the higher vehicle segments are very well represented by primarily various German automotive original equipment manufacturers whose market position would appear to be very well entrenched.

PSA is also attempting to diversify its automotive sales geographically and increase its exposure to emerging markets, which are expected to represent the majority of global growth in the industry going forward. However, Europe still represented 58% of PSA’s 2011 total unit sales (despite the fact that the Company’s 2011 European volumes actually decreased by 6% year-over-year).

DBRS acknowledges that PSA incurred substantially negative free cash flow. However, the Company has adopted several countermeasures aimed at moderating its cash burn going forward (and further bolstering its sound liquidity position). These include (among other items): cost reductions aimed at a level of EUR 1 billion; prioritization of research and development/capital expenditures; and asset disposals. Regarding the asset disposals, the Company last month concluded the sale of its rental car business (conducted by its Citer and Atesa subsidiaries). The disposal effectively reduced the Company’s indebtedness by EUR 440 million (from prior-year-end levels). PSA is also aiming to divest some of its real estate assets and is looking to sell an equity stake in its GEFCO subsidiary (transportation and logistics), with total 2012 asset disposals (including the completed Citer sale) targeted at EUR 1.5 billion.

On February 29, 2012, PSA and General Motors Company (GM) announced a long-term global strategic alliance (the Alliance); (for details, please refer to DBRS’s associated press release of the same date). Concurrent with the announcement of the Alliance, PSA also indicated that it plans to raise EUR 1 billion through a rights issue in which GM is expected to participate and become a 7% shareholder in PSA (thus becoming the second largest Company shareholder behind the Peugeot family). DBRS considers the Alliance to be mildly positive to the Company’s business profile, recognizing the potential benefits in terms of achieving increased scale efficiencies as well as the future sharing of vehicle platforms and components. However, the announcement of the Alliance, in isolation, had no effect on PSA’s ratings. DBRS notes that positive impacts of the Alliance are likely to be limited over the near term, with significant associated synergies and new product launches not expected before the 2015 to 2016 time frame. PSA also confirmed that it would continue to address its overcapacity issues in Europe over the near term on essentially an independent basis.

The trend on the rating could be changed to Stable in the event that PSA’s automotive operations revert to material profitability, with demonstrated progress in Europe (in terms of reversing recent market share losses and addressing the Company’s overcapacity issues), bolstered by further inroads made in emerging automotive markets. However, should the European market continue to contract significantly such that the Company’s core automobile segment incurs material losses that are not offset by PSA’s other industrial segments – thereby leading to higher indebtedness and further erosion of the Company’s liquidity position – a negative rating action would likely result.

Notes:
All amounts are in euros unless otherwise specified.

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