TEXT - Fitch cuts Peugeot S.A. long-term issuer default rating
(The following statement was released by the rating agency)
Feb 25 - Fitch Ratings has downgraded Peugeot SA's (PSA) Long-term Issuer Default Rating (IDR) to 'B+' from 'BB-' and affirmed the senior unsecured rating at 'BB-' with a Recovery Rating (RR) of 'RR3'. The Outlook on the Long-term IDR is Negative. The downgrade reflects our concerns that operating losses at PSA's core automotive division and negative free cash flow (FCF) at group level may not be curbed at the speed and extent assumed by the company and previously expected by Fitch. We believe that a return of credit ratios firmly in line with the 'BB' rating category is subject to material execution risk and could be beyond the Outlook horizon of the next 12 to 18 months. In particular, we are concerned by the continuously adverse market environment, notably in Europe, from where PSA still derives a majority of its sales, and which is largely outside of the company's control. Furthermore, higher sales and operating margins will also depend on PSA's ability to profitably increase market shares, which in turn will depend on the customer's acceptance of the group's upcoming models and product strategy. PSA's updated strategy may prove long and difficult to implement and produce effect. The affirmation of the senior unsecured rating reflects a RR of 'RR3' pointing to recovery prospects between 50% and 70% and a one-notch uplift from the 'B+' IDR. KEY RATING DRIVERS Uncertain Timing of Recovery PSA expects to return to positive automotive profitability and operating FCF by end-2014. However, Fitch is more cautious than the group and believes that the poor operating environment, the potential for durably weak economic conditions and thus depressed new car sales, as well as notable execution risks in successfully implementing the group's strategy, are likely to delay PSA's targets until at least 2015. Fitch is particularly concerned about the potential for a higher-than-expected sales decline in France and Germany. Adverse Environment In Europe, we currently expect sales to decline for the sixth straight year by a further 3% to 4% in 2013, and pricing pressure to remain intense, especially in PSA's main segments. While we expect the contribution of non-European markets to increase steadily in the foreseeable future, both on the top line and on profitability, competition will intensify in these markets as all manufacturers target them to mitigate losses in other parts of the world. High volatility also remains a key characteristic of emerging markets. Product Positioning PSA recently updated its product strategy to clarify the positioning of its two brands Peugeot and Citroen. We believe this strategy makes sense overall but carries substantial execution risk and could take many years to bear fruit. In particular, we are concerned that the existence of both entry-level/basic models and aspiring higher-end products within the two brands will not be easily understood and accepted by customers. In addition, several other manufacturers are following the same path and competition will remain relentless. Negative Profitability and FCF The automotive division posted a material -3.9% operating margin in 2012, and we expect only a slight improvement to -3.4% in 2013. Positive results from Faurecia and Banque PSA Finance (BPF) nearly offset these losses and led to a -1% group operating margin in 2012, which we expect to improve to -0.5% in 2013. Negative FCF from industrial operations was a significant EUR3.1bn before EUR2.4bn in asset sales and exceptional dividends from BPF and a EUR1.1bn capital increase. Weak Metrics We do not expect a material improvement in key credit metrics before at least end-2014. Fitch believes funds from operations (FFO) gross adjusted leverage will remain close to 7x at end-2013, (6.7x at end-2012, up from 3.4x at end-2011); net leverage close to 4x; and cash from operations/adjusted debt to improve only slightly to less than 15% at end-2013, from 6% at end-2012. These ratios are typically commensurate with the 'B' rating category. Progress in Restructuring In 2012 PSA accelerated its restructuring, with actions worth EUR1.2bn including the closure of a factory and reorganisation of another by 2014. This comes on top of existing material cost reduction. The group is also on track with its cash-preservation measures such as an improvement in working capital and a reduction in capex. Expected synergies from the alliance with GM have been confirmed. Solid Liquidity Immediate liquidity issues are not a concern. PSA reported EUR6.8bn in cash at end-2012, including EUR5.4bn at industrial operations, further bolstered by EUR3.2bn of total undrawn credit facilities. Refinancing of BPF which is critical to support the group's sales has been secured by a French state guarantee for up to EUR7bn. RATING SENSITIVITIES Positive: Future developments that could lead to positive rating actions include: - The group's automotive operating margins becoming positive on a sustained basis - FCF remainingpositive, leading in particular to FFO adjusted gross leverage below 3x Negative: Future developments that could lead to negative rating action include: - The environment continuing to deteriorate, leading to further revenue decline and continuous negative operating margins (actual or expected) at the automotive division - Further negative FCF in 2015 - Deteriorating liquidity (Caryn Trokie, New York Ratings Unit)
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