DBRS Downgrades PSA Peugeot Citroën to BB, Trend Remains Negative

DBRS has today downgraded the Issuer Rating of PSA Peugeot Citroën (PSA or the Company) to BB from BB (high). The rating action reflects PSA’s ongoing cash burn (which worsened in H2 2012 vis-à-vis H1 2012) and associated deterioration in its financial profile amid very weak conditions in its core European market. Pursuant to the “DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers” methodology (January 2013), DBRS has also downgraded the Company’s Senior Unsecured Debt rating to BB from BB (high), in line with the associated recovery rating of RR4, which remains unchanged. The trend on the ratings remains Negative, reflecting the Company’s assumptions that the European market is likely to remain at 2012 levels for several years, with this continent continuing to represent the majority of PSA’s automotive sales (notwithstanding continuing efforts toward improving its geographic diversification).

The Company recently announced its full year 2012 results, which reflect an ongoing deterioration in its financial performance. Worldwide unit sales (including complete knock down units) amounted to 3.0 million units, which represented a decline of 16% year over year. Sales (assembled vehicles only) in PSA’s core European continent dropped by 15%; this was only slightly offset by a 3% increase in volumes outside Europe. The core automotive division incurred a recurring operating loss of EUR 1.5 billion (as reported by PSA); this was only partly offset by ongoing profitability of Banque PSA Finance (sales financing) and majority-owned Faurecia (automotive components). Moreover, on a consolidated level, PSA incurred a net loss of EUR 5 billion, incorporating impairment charges of EUR 3.9 billion to assets of the automotive division (consisting of an impairment to global automotive assets of EUR 3.009 billion following International Accounting Standard (IAS) 36 and of writedowns of EUR 879 million resulting from IAS 12 on deferred tax assets). While DBRS recognizes that the impairment charges are non-cash and do not adversely impact the Company’s liquidity position, the charges nonetheless underscore the bleak outlook and deterioration of the European automotive market.

The Company’s cash burn rate in recent periods is concerning. Through H1 and full year 2012, PSA’s industrial operations generated negative free cash flow in the amounts of EUR 400 million and EUR 1.9 billion (as calculated by DBRS), respectively. The Company’s cash burn in H2 2012 therefore amounted to approximately EUR 1.5 billion, which exceeded DBRS’s expectations. DBRS notes that PSA’s income and coverage-based metrics were already weak for the assigned ratings. However, this was partly offset by PSA’s leverage, which remained at reasonable levels as the Company’s substantial cash burn was considerably mitigated by countermeasures that included asset disposals of EUR 2 billion in addition to an equity offering that generated proceeds of roughly EUR 1 billion. DBRS recognizes that PSA effectively achieved its objectives previously outlined in its 2012 cash action plan, including cost reductions of EUR 1.2 billion and the aforementioned asset disposals, as well as a reduction in inventories to 416,000 units (i.e., below 2010 levels). However, while projected to moderate, DBRS notes that PSA’s cash burn is expected to persist at least through 2013. Furthermore, the countermeasures executed in 2012 are unlikely to be repeated (at least not in a similar magnitude), with the Company’s financial profile and credit measures continuing to deteriorate as a result.

The Company has undertaken several initiatives in response to the very challenging environment. PSA is proceeding further with its strategic alliance with General Motors Company (GM), with product and platform developments being increasingly coordinated between the two companies. The Company is also progressing in its efforts to restructure its operations in France. PSA recently obtained an agreement with its unions regarding the transfer of employees from its Aulnay plant to other facilities, effectively indicating that the wind-down of Aulnay remains on track with its planned 2014 closure. The Company’s current restructuring plan is targeting staff cuts of 8,000 throughout France. PSA is also looking 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. The Company is planning a significant product offensive, with 13 new models scheduled to be launched in 2013; as such, PSA’s product cadence will remain favourable, with an average model age of 3.5 years. Moreover, the Company remains among the leaders with respect to carbon dioxide emissions, having already achieved compliance with 2015 EU regulations.

DBRS notes that the liquidity position of PSA’s automotive operations remains sound. As of December 31, 2012, total liquidity amounted to EUR 9.7 billion, consisting of cash balances of EUR 7.3 billion in addition to the undrawn revolving credit facility of EUR 2.4 billion. PSA’s debt repayment schedule is also manageable, with a weighted-average maturity of 4.1 years. Regarding Banque PSA Finance, it has attained sufficient financings for more than three years through the following: the renegotiation of EUR 11.5 billion of facilities with relationship banks and a guarantee of EUR 7 billion of the French state to back new bond issues, as well as an increase in securitization financings.

However, the Negative trend on the ratings reflects the severe conditions in the European automotive market, which are expected to persist over the near term. Should the Company demonstrate ongoing progress in its recovery plan and reduce its level of cash burn (PSA has targeted its cash burn in 2013 to be at approximately half of last year’s levels, partly through a planned reduction of approximately EUR 600 million in capex and capitalized research and development), the trend on the ratings could be changed to Stable. However, in the event that the Company’s losses or negative free cash flow persist at levels materially in excess of its projections, this would likely lead to a further negative rating action.

Notes:
All figures are in Euros unless otherwise noted.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.