TEXT-Fitch cuts Peugeot's senior unsecured rating to 'BB-'
Sept 19 - Fitch Ratings has downgraded Peugeot SA's (PSA) Long-term Issuer Default Rating (IDR) and senior unsecured rating to 'BB-' from 'BB'. The Outlook on the Long-term IDR is Negative. The downgrade reflects Fitch's reassessment of the European auto sector overall following a further review of PSA's, Renault SA's ('BB+'/Stable) and Fiat Spa's ('BB'/Negative) current and expected performance and a deeper comparison with close international peers. In particular, it is underpinned by Fitch's expectations that PSA will continue to post negative free cash flow (FCF) through 2014 and the ongoing challenges it faces to improve its business and financial profile. In particular, Fitch is concerned about the group's positioning in the less profitable small- and medium-sized car segments, where the agency does not expect the ongoing fierce competition and substantial price pressure to abate in the near term, as well as the weak or negative profitability in several international markets, which could take time to overcome, as competition is also mounting in these markets. Fitch projects further cash absorption at least in 2012 and 2013, and the potential for further cash burn in 2014 remains high. This follows already significant negative FCF in 2011 (EUR1.9bn) and insufficient positive FCF in 2009-2010 to cover the EUR3.9bn of negative FCF in 2008. The agency believes that underlying cash from operations (CFO) will gradually improve, in line with the group's expectations that it will return to breakeven by end-2014 at FCF level. However CFO will remain weak for the rating category in 2012-2013 and may not be enough to cover ongoing capex at the group level, Fitch views positively PSA's significant efforts to bolster its revenue base, streamline its cost structure and preserve or generate cash. These measures will have a positive effect on the group's profitability and balance sheet. However, the agency is concerned that improvement will be gradual and that it will take time for cost-saving actions to fully accrue on earnings and feed through to the cash flow statement, notably in the current adverse environment. The Negative Outlook reflects high execution risks as PSA remains seriously exposed to a further deterioration in the environment. A further decline in revenue would compound the short-term costs associated with restructuring measures and weigh heavily on profitability before the positive impact from restructuring could benefit cash generation. The environment remains extremely difficult for volume manufacturers in Europe, from continuously anaemic demand driven by poor macro-economic conditions, fierce competition and aggressive discounting. Fitch considers that a further contraction of new vehicle sales in PSA's main European markets in 2013 is highly probable following Fitch's base case of a 7% decline in 2012. The Outlook could be revised to Stable if Fitch considers that macro-economic risks recede sufficiently to enable the group to successfully implement its measures to boost revenue and streamline costs, including the sustainability of the group's new models success and improved profitability at its international operations. It could also be driven by a decline in leverage at a quicker pace than currently forecast by Fitch. Fitch expects that declining underlying profitability and rising debt from projected negative FCF will push FFO gross adjusted leverage and CFO on adjusted gross debt to the bottom end of the 'BB' rating category for at least another two years. Fitch calculates that FFO gross adjusted leverage will rise continuously to more than 3.6x at end-2013 from 3.2x at end-2010, despite asset sales and that CFO on adjusted gross debt will remain under 25% in the same period. Nonetheless, the agency has no specific concern that the company could face immediate liquidity issues. The group enjoyed a healthy liquidity cushion of EUR7.6bn in cash and equivalents at end-June 2012. It also reported EUR1.4bn in financial assets, which Fitch excludes from its calculation of net debt, but that could provide additional flexibility in case of heavy financial stress. In addition, committed credit lines of EUR2.4bn at PSA, EUR660m at Faurecia and EUR8.0bn at Banque PSA Finance were undrawn at end-June 2012. In addition, the group has taken several measures to preserve its liquidity and others to raise cash. In particular, the group is in the middle of a EUR1.5bn asset disposal programme, including its rental car business Citer, which it has already disposed of for EUR0.5bn and EUR0.3bn of real estate divestitures. PSA also expects to finalise the sale of a large stake in its logistics division Gefco, although the total amount and timing remains uncertain. The industrial business's liquidity will also benefit from the payment of an exceptional EUR360m dividend from BPF, although the impact will be neutral at group level. Finally, the 7% stake purchase in PSA by GM in Q112 was accompanied by a EUR1bn capital increase. WHAT COULD TRIGGER A RATING ACTION? Positive: Future developments that may, individually or collectively, lead to positive rating action include - The group's automotive operating margins becoming positive - FCF turning positive, leading in particular to FFO adjusted gross leverage below 2.5x Negative: Future developments that may, individually or collectively, lead to negative rating action include - The environment continuing to deteriorate, leading to further revenue decline at group level and continuous negative operating margins (actual or expected) - If Fitch believes the group will not be able execute its plans of returning to positive FCF by end-2014 - Deteriorating liquidity Additional information is available at www.fitchratings.com. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable criteria, 'Corporate Rating Methodology' dated 8 August 2012 is available at www.fitchratings.com Applicable Criteria and Related Research: Corporate Rating Methodology
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