DBRS Changes Trend on Peugeot SA to Positive from Stable

DBRS Limited (DBRS) confirmed the Issuer Rating of Peugeot SA (PSA or the Company) at BB (high). Concurrently, pursuant to DBRS’s Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, DBRS also confirmed PSA’s Senior Unsecured Debt rating at BB (high), given the associated recovery rating of RR4, which remains unchanged. The trend on the ratings has been changed to Positive from Stable, recognizing the Company’s ongoing improvement in its earnings and cash flow generation. DBRS notes further that PSA’s earnings momentum (which incorporates not only ongoing cost reductions but also organic revenue growth) has not been meaningfully impeded by its 2017 acquisition of the Opel and Vauxhall (OV) automotive subsidiaries (from General Motors Company (GM), in addition to the acquisition of the associated financial services operations from GM Financial Company), the post-acquisition performance of which has been readily exceeding DBRS’s expectations. As such, the Company’s credit metrics and financial risk assessment (FRA) have improved to levels that exceed the currently assigned ratings.

PSA’s favourable financial performance in 2017 through H1 2018 reflects stable automotive conditions in its core European market (which, as a function of last year’s OV acquisition, now represents more than three quarters of the Company’s global sales volumes), bolstered by PSA’s successful product offensive in the sport utility vehicle segment, which has resulted in considerably positive product mix effects. Earnings also continue to benefit from the Company’s cost-reduction activities, with these contributing factors being only partly offset by external challenges in the form of higher raw material costs and adverse foreign exchange developments. In addition to the solid performance of the automotive operations, the Company’s consolidated results reflect improved earnings of its automotive equipment and financial services businesses.

Moreover, performance of the recently acquired OV operations has readily surpassed DBRS’s expectations. After incurring consecutive losses under GM that date back to 1999, OV incurred only a moderate recurring operating loss of EUR 179 million over the last five months of 2017 (the acquisition of the automotive businesses having closed as of August 1, 2017). However, in H1 2018, OV generated a recurring operating profit of EUR 502 million, representing a sound operating margin of 5%. OV’s improved performance significantly reflects fixed cost reductions that have exceeded targets thus far. Going forward, DBRS expects OV’s operating result to remain positive amid reasonable regional industry conditions, ongoing cost reductions (facilitated by the agreement between the Company and OV’s German unions reached in May 2018 outlining voluntary headcount reductions and deferred wage increases) and projected firmer pricing enabled by OV’s forthcoming product offensive and more disciplined sales practices.

Regarding industry headwinds stemming from ongoing trade/tariff challenges, DBRS notes that PSA, on balance, is currently less affected than many of its automotive peers. While the Company faces uncertainties linked with Brexit, primarily affecting its Luton and Ellesmere Port assembly facilities in the United Kingdom (acquired through the OV acquisition), PSA is only slightly exposed to the trade disputes between the United States and China, with the Company having a relatively modest presence in China and no presence at all in North America (although PSA has publicly disclosed its intent to re-enter the U.S. market over the medium to long term).

Notwithstanding ongoing challenges facing the Company including, among others, commodity cost pressures, tightening emissions controls and additional restructuring activities, DBRS recognizes PSA’s materially stronger FRA and, assuming its recent operating performance remains essentially on track, anticipates upgrading the Company’s ratings within early 2019.

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 under Related Research below 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 and Supplier Industries, which can be found on dbrs.com under Methodologies.

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

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