DBRS Upgrades Peugeot SA to BB (high), Trend Changed to Stable

DBRS Limited (DBRS) has today upgraded the Issuer Rating of Peugeot SA (PSA or the Company) to BB (high) from BB following the Company’s recent announcement that it had closed the acquisition of General Motor Company’s (GM) Opel and Vauxhall (industrial) subsidiaries (the Acquisition). Concurrently, pursuant to DBRS’s DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, PSA’s senior unsecured debt rating is also upgraded to BB (high), given the associated recovery rating of RR4 (unchanged). The trend on the ratings is Stable. All ratings have been removed from Under Review with Developing Implications, where they were placed on March 7, 2017, following PSA’s announcement that it had reached an agreement with GM regarding the Acquisition.

DBRS notes that prior to the Acquisition announcement, a Positive trend had already been assigned to the ratings in March 2016, recognizing that the Company’s (stand-alone) operating performance had been trending markedly positively in line with material cost-cutting measures. Moreover, improved regional market conditions helped increase not only volumes, but also product pricing and mix. This, in combination with implemented measures to bolster PSA’s equity base, served to strengthen the Company’s recent stand-alone credit metrics to levels above those commensurate with the prior ratings.

The ratings upgrade reflects DBRS’s opinion that PSA’s business risk assessment has in turn moderately improved as a result of the Acquisition, as it represents a meaningful increase in terms of scale (which remains critical in efficiently absorbing the high product development costs associated with the automotive industry), with total global unit sales increasing to 4.3 million units on a pro forma basis from 3.1 million units on a stand-alone basis (both as of year-end 2016). Moreover, while DBRS acknowledges that the Acquisition serves to increase the Company’s dependence on its core European market for automotive sales, this is more than offset by PSA’s materially stronger market position in the region, with the combined entity attaining a strong number-two position in the continent, behind only Volkswagen AG.

Regarding the Acquisition, DBRS notes that this was completed under favourable terms for PSA, with GM paying down the indebtedness of Opel and Vauxhall while also effectively retaining the majority of associated pension and retiree obligations. DBRS further observes that the Company can financially absorb the Acquisition cost (of a total amount of EUR 1.3 billion, consisting of EUR 0.67 billion in cash and EUR 0.65 billion in the form of warrants) and near-term projected losses and associated cash burn of Opel and Vauxhall, such that credit metrics on a pro forma basis remain at solid levels in the context of the newly upgraded ratings.

DBRS sees limited upside potential to the ratings over the near term, recognizing that PSA incurs significant execution risk associated with the successful integration of the operations of Opel and Vauxhall (notwithstanding that the entities have closely collaborated on numerous joint projects over the past several years) and the fact that targeted synergies are not anticipated to considerably ramp up prior to 2020 (by which point they are projected to approximate EUR 1.1 billion per annum). Conversely, a meaningful downturn in the Company’s core European market 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 principal methodology is Rating Companies in the Automotive Manufacturing Industry, which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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