DBRS Confirms PSA Peugeot Citroën at BB, Trend Changed to Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating of PSA Peugeot Citroën (PSA or the Company) at BB. Concurrently, pursuant to DBRS’s Rating Methodology for Leveraged Finance, PSA’s senior unsecured debt rating is confirmed at BB, in line with the associated recovery rating of RR4 (unchanged). The trend has been changed to Stable from Negative, recognizing the improved earnings and cash flow generation of the Company’s industrial operations in conjunction with last year’s capital increase of EUR 3 billion; these measures effectively restoring PSA’s financial profile to levels commensurate with the ratings. Moreover, while Europe remains dominant, the Company’s recent progresses in China, (which are likely to continue in light of projected ongoing regional industry growth and Dongfeng Motor Group (Dongfeng) now owning a 14% stake in PSA), are nonetheless serving to lessen its dependence on that continent.

PSA’s improved automotive performance in 2014 reflected firmer product mix and pricing gains, bolstered by cost reductions (notably lower production and research and development expenses). Additionally, earnings of majority-owned Faurecia (automotive equipment) were also slightly stronger given progresses made in Europe and China, (with North America remaining a headwind to earnings growth). This notwithstanding, DBRS notes that the margins of both businesses remain rather lackluster for their respective segments. Going forward, while the near-term automotive outlook remains mixed (with conditions in Latin America and Russia in particular expected to remain challenging), DBRS estimates that the earnings performance of the core automotive segment will nonetheless persist at break even to modestly positive levels; longer term, the Company has targeted an operating margin of 2% for its automotive segment by 2018.

Despite the lackluster margins, PSA’s balance sheet and liquidity position are sound, with industrial cash balances totalling EUR 8.4 billion (as of December 31, 2014), supplemented by full availability of its syndicated EUR 3 billion credit facility. Moreover, the net debt position of PSA’s industrial operations has strengthened considerably, improving to 5% (as calculated by DBRS) as of year-end 2014 from 41% the prior year.

Additionally, the competitive position of PSA’s financing division, Banque PSA Finance, has benefited considerably from the announced partnership with Banco Santander’s consumer finance division. This has resulted in the removal of the French State Guarantee (for future Banque PSA Finance transactions). Moreover, the partnership is likely to result in lower funding costs that should bolster the results of the financial services operations going forward, with the industrial operations also likely to benefit in the form of a projected cumulative cash infusion (from Banque PSA Finance) of approximately EUR 1.5 billion through 2018.

The Stable trend reflects DBRS’s expectation that PSA’s earnings improvement going forward will likely prove protracted amid conditions in its core European market that remain challenging. If, however, the performance of the Company’s industrial operations deteriorates such that materially negative net free cash flow were to reoccur, this could result in negative rating implications.

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 methodologies are Rating Companies in the Automotive Manufacturing Industry, Global Methodology for Rating Finance Companies and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers which can be found on our website under Methodologies.

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