DBRS Morningstar Confirms Peugeot SA at BBB (low) with a Negative Trend; Removes Ratings from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Peugeot SA (PSA or the Company) at BBB (low) with a Negative trend. DBRS Morningstar also discontinued and withdrew PSA’s Senior Unsecured Debt Rating; the discontinuation and withdrawal are not related to the creditworthiness of the Company. Pursuant to the moderate scenario outlined in the DBRS Morningstar commentary titled “Global Macroeconomic Scenarios: Application to Credit Ratings” (initially dated April 22, 2020, and most recently updated on September 10, 2020, as indicated in the subsequent document titled “Global Macroeconomic Scenarios: September Update”), DBRS Morningstar projects the Company’s financial risk assessment (FRA) to remain at levels commensurate with the existing rating despite a softening of PSA’s credit metrics given the global escalation of the Coronavirus Disease (COVID-19) pandemic. The Negative trend reflects the ongoing challenges facing the automotive industry given uncertainty about the continued progression of the coronavirus pandemic across various jurisdictions and its potential impact on sales or production levels. With this rating action, DBRS Morningstar removed PSA’s Issuer Rating from Under Review with Negative Implications, where it was placed on March 27, 2020.

DBRS Morningstar notes that prior to the pandemic, the Company’s FRA was at strong levels (providing meaningful cushion in the context of the current rating) given PSA’s recent earnings momentum as automotive margins were bolstered by firmer product mix (in line with the Company’s successful product offensive in the utility vehicle segments), efficiency gains, and positive pricing. However, as with other original equipment manufacturers (OEMs), PSA’s financial results this year have trended materially weaker (compared with similar prior-year periods), substantially reflecting challenges associated with the coronavirus pandemic. More specifically, in the first half of 2020 (H1 2020), the Company reported a 35.5% decline in automotive revenues to EUR 19.6 billion. Additionally, while PSA’s earnings performance through the initial wave of the pandemic was somewhat favourable compared with other OEMs, the segment’s adjusted operating margin also decreased considerably to 3.7% (from 8.7% generated in H1 2019). Currently, DBRS Morningstar anticipates PSA’s automotive revenues to decline by approximately 25% compared with 2019 levels, with the operating margin also being significantly affected (though projected to remain at modestly positive levels). DBRS Morningstar expects free cash flow generation to decrease correspondingly with lower earnings (although a slight decline in capital expenditures and a suspension of ordinary dividends represent a partial offset), possibly exacerbated by material working capital cash usage. As such, DBRS Morningstar projects the Company’s credit metrics to meaningfully soften in 2020, followed by only a moderate recovery in the following year.

Notwithstanding the above, PSA’s balance sheet and liquidity position remain solid. As of June 30, 2020, despite material cash burn in H1 2020 given the progression of the coronavirus pandemic, the Company’s automotive segment maintained a substantial net cash position of approximately EUR 7 billion (excluding indebtedness of subsidiary Faurecia SA, which will be spun off as a function of PSA’s anticipated merger with Fiat Chrysler Automobiles NV (FCA)). Moreover, PSA retained strong access to the capital and bank markets, as demonstrated by its EUR 1 billion bond issuance in May 2020, with the Company also obtaining an additional syndicated credit facility of EUR 3 billion in April 2020. This loan facility supplements PSA’s prior EUR 3 billion back-up line, with both facilities remaining undrawn as of June 30, 2020. As such, DBRS Morningstar deems the Company’s liquidity position to be sufficient to withstand any reasonably foreseeable scenario associated with the pandemic.

Notwithstanding the negative effects of the coronavirus pandemic on global automotive sales and production, DBRS Morningstar notes that the ensuing sales recovery across major jurisdictions so far has moderately exceeded its expectations. The recovery thus far has been strongest in China and the United States, to which PSA’s collective exposure is very modest. However, in September, European monthly automotive sales also reverted to growth (compared with similar prior-year periods) for the first time since the initial onset of the pandemic. This sales recovery could yet be undermined, however, by the trajectory of the pandemic, which (with the apparent exception of China) shows no signs of abating across several major markets.

Consistent with the Negative trend on the rating and recognizing the ongoing uncertainty regarding the ultimate severity and duration of the coronavirus pandemic, DBRS Morningstar notes that an additional progression of the pandemic (such that it readily approximates the adverse scenario as outlined in the above-cited commentary) or sustained further erosion in PSA’s operating margins could result in additional downward rating pressures. Conversely, should the worst effects of the coronavirus pandemic be significantly contained in 2020 and followed by a meaningful recovery notwithstanding lingering remnants of the pandemic across various jurisdictions, the trend on the rating could be changed to Stable. Finally, DBRS Morningstar notes that the completion of PSA’s planned merger with FCA (currently expected to close within Q1 2021) would trigger an event-driven review of the rating.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 22, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS Morningstar 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 (DBRS Morningstar) for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, DBRS Morningstar used “Rating Companies in the Automotive Manufacturing and Supplier Industries” (October 22, 2020) as the primary rating methodology in determining the rating of the parent company, Peugeot SA. Subsequently, “DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships” (November 2, 2020) was applied to assess the corporate structure of the Peugeot group of companies.

The last rating action took place on March 27, 2020, when DBRS Morningstar placed the ratings of Peugeot SA Under Review with Negative Implications.

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.

With Rated Entity or Related Third Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar 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, Diversified Industries
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries & Sports Finance
Initial Rating Date: August 16, 2006

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
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-- Rating Companies in the Automotive Manufacturing and Supplier Industries (October 22, 2020)
https://www.dbrsmorningstar.com/research/368670/rating-companies-in-the-automotive-manufacturing-and-supplier-industries

-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020)
https://www.dbrsmorningstar.com/research/369167/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships