DBRS Upgrades Peugeot SA to BBB (low), Changes Trend to Stable

DBRS Limited (DBRS) upgraded the Issuer Rating and Senior Unsecured Debt rating of Peugeot SA (PSA or the Company) to BBB (low) from BB (high). All trends are Stable. The upgrade reflects PSA’s continued earnings momentum. Moreover, the Company has led its Opel and Vauxhall (OV) automotive subsidiaries (acquired in 2017 from General Motors Company (rated BBB (high) with a Stable trend by DBRS) to become meaningfully profitable sooner than anticipated by DBRS. As such, PSA’s credit metrics and financial risk assessment (FRA) are at levels that readily exceed the prior ratings, with DBRS previously indicating that the Company’s ratings would likely be subject to an upgrade within early 2019 so long as PSA’s recent operating performance remained essentially on track. As a result of the Company’s Issuer Rating now being investment grade, there is no recovery analysis performed with respect to PSA’s Senior Unsecured Debt, with the associated recovery rating being withdrawn.

PSA’s favourable financial performance reflects reasonable conditions in its core European market, where industry volumes in 2018 trended at essentially flat levels year over year (YOY). As a function of the OV acquisition, PSA’s dependence on Europe has increased further, with the continent representing 80% of its global sales volumes. However, OV as well as the Company’s legacy brands, Peugeot, Citroën and DS outperformed the regional market, with PSA’s total European market share increasing to 17.1%, representing a solid number two position. DBRS notes that PSA’s favourable European performance more than offset declines in other regions, most notably in Asia (substantially incorporating China) and the Middle East & Africa (significantly reflecting the Company’s suspension of sales in Iran). In line with the above, PSA’s automotive business achieved significant revenue growth given higher volumes, firmer product mix (reflecting the Company’s successful product offensive in the sport-utility vehicle segment) and pricing gains. Moreover, the segment’s 7.6% operating margin was very solid, bolstered by ongoing efficiency initiatives. Significantly, the OV business attained a respectable operating of margin of 4.7%, representing its first annual profit in two decades. In addition to the automotive segment, PSA’s automotive components and finance segments also performed well, generating higher earnings YOY.

Going forward, the Company’s earnings are estimated to trend similarly to 2018 results. While industry volumes in Europe are projected only to remain at roughly flat levels, PSA appears likely to benefit from firmer product mix in line with significant planned product launches (as well as the full-year availability of recently introduced models) in the utility and light commercial vehicle segments. Moreover, the Company is targeting further efficiencies and notably additional progress at OV in the form of increased synergies and ongoing pricing gains, among others.

DBRS expects the ratings to remain constant over the near term. While a rapid and material industry downturn could result in negative rating implications, DBRS considers such a scenario rather unlikely, noting that PSA’s FRA effectively provides some cushion against unexpected challenges at the current rating level. Conversely, further positive rating actions are rather unlikely in the context of cost headwinds facing the industry. These include, notably, tightening CO2 emissions regulations in the Company’s core European market, which threaten to represent a material drag on industry profitability, causing DBRS to apply some additional caution regarding PSA’s FRA in the determination of the final ratings. However, over the medium to long term, the Company could be subject to positive rating actions should it meaningfully improve its geographic diversification; PSA is targeting to progressively increase its presence in China while also planning an eventual return to the U.S. market.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2018), which can be found on dbrs.com under Methodologies & Criteria.

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 Documents or by contacting us at info@dbrs.com.

The rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this transaction took place on August 3, 2018, when the trend on Peugeot SA’s ratings was changed to Positive from Stable.

Solely with respect to ESMA regulations in the European Union, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Robert Streda, Senior Vice President, Autos
Rating Committee Chair: Charles Halam-Andres, Managing Director, Industrials & Natural Resources
Initial Rating Date: November 27, 2000

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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