DBRS Confirms PSA Peugeot Citroën at BB Following EUR 3 Billion Capital Increase, Trend Remains Negative

DBRS has today confirmed the Issuer Rating of PSA Peugeot Citroën (PSA or the Company) at BB following the Company’s recent announcement of its full-year 2013 results amid other significant developments, including (among others) a planned capital increase of EUR 3 billion, with the French State and Dongfeng Motor Group (Dongfeng) assuming ownership stakes in PSA (further details below). Concurrently, pursuant to DBRS’s Rating Methodology for Leveraged Finance, DBRS has also confirmed the Company’s senior unsecured debt rating at BB, in line with the associated recovery rating of RR4 (which remains unchanged). The trend on the ratings remains Negative, as DBRS notes that the Company’s credit metrics continue to be weak for the assigned ratings, with further similar financial performance likely leading to a downgrade. While DBRS views the capital increase favourably, DBRS notes that PSA continues to face many significant headwinds in its efforts to revert to profitability, the most significant being the Company’s overdependence on its native European continent for sales.

Regarding specifics of the planned capital increase, it is to consist of a reserved capital increase of EUR 1.05 billion and a rights issue of EUR 1.95 billion. The reserved capital increase is to be subscribed equally by the French State and by Dongfeng in an amount of EUR 524 million each. Concerning the rights offering of EUR 1.95 billion, this will also be subscribed by each of the French State and Dongfeng (in an amount of EUR 276 million each). Moreover, the Peugeot family will participate as well, such that it would also result in a 14% ownership stake in PSA. Finally, the remaining amount (up to EUR 1.4 billion) would be fully underwritten by a syndicate of banks and open to the market.

As a function of the above, each of the French State, Dongfeng and the Peugeot family would each end up with respective 14% ownership positions in PSA. This may serve to undermine the corporate governance of the Company, given three distinct entities of equal ownership positions but potentially conflicting objectives. In an attempt to mitigate such concerns, PSA has indicated that its supervisory board would include six independent members (while also being chaired by an independent member), as well as two representatives of each of the French State, Dongfeng and the Peugeot family.

The capital increase and Dongfeng’s associated ownership position in PSA aim to bolster the Company’s presence in China (the world’s largest automotive market), as well as in South East Asia (while also deriving associated synergies). Moreover, the capital injection will also serve to fund investments aimed at strengthening PSA’s future product pipeline without unduly undermining the Company’s liquidity position. This notwithstanding, PSA’s cash burn is expected to persist over the near term as the Company likely increases its capital expenditures (from low 2013 levels in support of its future product plans.

Concurrent with the announcement of the planned capital increase, PSA also made several additional statements. In a related matter, the Company announced a renewal (contingent upon the completion of the capital increase) of its syndicated credit facility in the amount of EUR 2.7 billion, consisting of a five-year tranche of EUR 2.0 billion and a three-year tranche of EUR 0.7 billion. The Company also announced the appointment of Carlos Tavares, who assumed responsibility of PSA’s operations as of February 20, 2014, and will become President of the Company’s Managing Board as of March 31, 2014 (succeeding Philippe Varin). Finally, in order to bolster the capabilities of PSA’s captive finance operations, the Company also announced that it has entered into exclusive negotiations with Santander Consumer Finance to form a 50/50 partnership to further develop Banque PSA’s activities in Europe. This last transaction is currently scheduled to close in the second half of 2015; upon effectiveness, the partnership would be able to fund its activities without the French State guarantee (which is currently in place to support the funding of Banque PSA).

Further to the above, PSA also recently announced its full-year 2013 results, which, while moderately improved year over year, continued to be weak and reflected ongoing difficult automotive conditions in Europe. Worldwide unit sales (excluding complete knockdown units) amounted to 2.8 million units, which was essentially flat year over year. Sales in PSA’s core European continent dropped by 7%; however, this was essentially offset by a 12% increase in volumes outside Europe. The core automotive division incurred a recurring operating loss of EUR 1.04 billion (as reported by PSA), partly offset by the ongoing profitability of Banque PSA Finance (sales financing) and majority-owned Faurecia (automotive components). On a consolidated basis, the Company’s recurring operating loss was narrowed to EUR 177 million from the prior-year level of EUR 560 million (both figures as reported by the Company). Earnings of the core automotive division continued to incorporate volume declines, which were exacerbated by significant foreign exchange headwinds; however, these negative factors were partly offset by firmer product mix and pricing (as a function of recent product introductions), as well as by ongoing cost reduction activities. While the Company’s cash burn rate was substantially reduced year over year, this was significantly a function of reduced capital expenditures and cash generated from working capital. Moreover, despite the reduced level of cash burn, DBRS notes that PSA’s credit metrics are weak for the assigned ratings.

Notwithstanding the current weak financial metrics, DBRS recognizes that PSA’s liquidity position nonetheless remains quite sound. As of December 31, 2013, cash balances of the automotive operations totalled EUR 6.2 billion, with such amount to be bolstered by the planned capital increase of EUR 3 billion. Moreover, as previously stated, the Company is also expected to renew its EUR 2.7 billion credit facility (contingent upon the completion of the capital release).

The Negative trend on the ratings underscores DBRS’s assessment that PSA’s financial risk profile remains weak for the assigned ratings amid market conditions that are projected to only slightly improve in the Company’s core European market. Should PSA be able to deliver materially improved results over the next six months to a year, the trend on the ratings could be changed to Stable. If, however, the Company’s financial performance persists at levels essentially similar to those of 2013, this would likely lead to a downgrade in the ratings.

Notes:
All figures are in Euros unless otherwise noted.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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