DBRS Confirms PSA Peugeot Citroën at BB, Changes Trend to Positive from 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, given the associated recovery rating of RR4 (which remains unchanged). The trend has been changed to Positive from Stable, recognizing the Company’s considerably improved earnings and cash flow generation. DBRS notes that the improved financial performance, amid other measures (including the EUR 918 million in dividends from Banque PSA Finance to the industrial operations and the EUR 3 billion capital increase implemented in 2014), has raised PSA’s financial profile to levels above the currently assigned ratings. Moreover, the Company’s sales diversification by geography has improved in line with its growing presence in China (which represented 25% of its worldwide unit sales last year), although PSA remains somewhat overdependent on Europe (which still accounted for more than 60% of aggregate sales in 2015).

PSA’s stronger automotive performance in 2015 reflects improved market demand, notably in its core European market where industry volumes increased by 9% year over year (YOY), in addition to positive foreign exchange developments and input cost reductions. However, these tailwinds notwithstanding, the Company’s operating results were most positively affected by achieved reductions in production and procurement costs, bolstered by firmer pricing and product mix. Significantly, PSA’s break-even point (as published by the Company) has markedly fallen to 1.6 million units as of 2015 from 2.6 million units in 2013 (as the Company readily outperformed its previously published break-even target of 2.0 million units). DBRS notes that the operating margin of 5% generated by the automotive segment in 2015 is quite sound for a mass-market original equipment manufacturer. Earnings of majority-owned Faurecia (automotive equipment) were also considerably stronger, given significant progresses in North America amid ongoing sound performance in Europe.

Going forward, while conditions across regional markets vary (particularly with Latin America and Russia likely to remain challenging), the near-term automotive outlook in aggregate remains moderately positive as industry volumes in PSA’s core European market and China are likely subject to further increases (with economic headwinds in the latter likely to be largely offset by vehicle purchase tax reductions in effect through YE2016). DBRS acknowledges that the Company faces challenges that include flat market share performance in Europe and foreign exchange volatility, among others. Moreover, increasing emissions regulation and a potential migration away from vehicles equipped with diesel engines represent additional headwinds, (although PSA is well positioned to continue the development of gasoline and alternative powertrains should this trend become considerably more pronounced). These notwithstanding, the Company’s considerably improved cost structure should enable the automotive operations to remain materially profitable over the near term, although the automotive margin of 5% generated in 2015 is likely to somewhat moderate.

In addition to stronger earnings in the industrial operations, the competitive position of Banque PSA Finance has benefited significantly from the partnership with Banco Santander’s consumer finance division as the 2015 performance of the segment improved significantly YOY, given higher revenues amid lower provisions for credit losses.

Reflecting such performance improvements and capital injections, PSA’s balance sheet and liquidity position are sound with industrial cash balances totalling EUR 10.5 billion as of December 31, 2015, supplemented by full availability of its syndicated EUR 3.0 billion credit facility. Moreover, the industrial operations as of YE2015 had a net cash position of EUR 3.5 billion (as calculated by DBRS), a substantial improvement from the net debt position of EUR 4.8 billion two years prior.

In line with the Positive trend and recognizing that margins may soften somewhat with respect to the stronger-than-expected performance in 2015, DBRS would consider upgrading the ratings in the event that the Company’s performance momentum persists and automotive margins remain at or above approximately 4% (with PSA’s financial profile continuing to benefit as a result).

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.

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