Fitch Affirms PSA at 'B+'; Outlook Negative

Wed Sep 18, 2013 10:12am EDT

(The following statement was released by the rating agency) BARCELONA/LONDON, September 18 (Fitch) Fitch Ratings has affirmed Peugeot SA's (PSA) Long-term Issuer Default Rating (IDR) at 'B+' and senior unsecured rating at 'BB-' with a Recovery Rating (RR) of 'RR3'. The Outlook on the Long-term IDR is Negative. The rating reflects the group's weakened position and poor credit metrics, driven notably by continuous cash burn as expected by Fitch in 2013 and 2014, in particular at the core automotive division. The Negative Outlook reflects the on-going challenges faced by the group to increase sales and revenue and curb operating losses and cash absorption in a continuously adverse market environment. PSA still derives a majority of its sales from Europe, in the mass-market segment where competition and price pressure are the fiercest, and we believe that a profitable sales increase outside Europe will be a long and difficult process. However, H113 results confirmed that the group was on track with its restructuring and that the situation has not deteriorated further since 2012. This gives us comfort that the worse may be behind for PSA and pressure on the rating has eased. Nonetheless, longer-term uncertainty and execution risk remain high regarding the group's ability to implement its overall business plan and its product strategy to produce results. KEY RATING DRIVERS Uncertain Timing of Recovery The ratings reflect our cautious expectations regarding PSA's ability to return to positive automotive profitability and operating free cash flow (FCF) by end-2014. We believe that the adverse environment, the potential for sustained weak economic conditions and thus poor new car sales, notably in France and Germany, as well as notable execution risks in implementing the group's strategy could delay PSA's targets until 2015. Adverse Environment In Europe, we currently expect sales to decline for the sixth consecutive year by a further 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 steadily increase in the foreseeable future, both to the top line and profitability, competition will intensify in these markets as all manufacturers target them to mitigate losses in other parts of the world. 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 persistent. Negative Profitability and FCF The automotive division posted a material negative 3.9% operating margin in 2012 although positive results from Faurecia and Banque PSA Finance (BPF) nearly offset these losses and led to a negative 1% group operating margin in 2012. However, H113 results were stronger and we expect an improvement of automotive and group margins to negative 3% and negative 0.3%, respectively, in 2013. Negative FCF from industrial operations was a significant EUR3.1bn before EUR2.4bn in asset sales and exceptional dividends from BPF and Gefco and a EUR1.1bn capital increase. Weak Metrics Fitch believes funds from operations (FFO) gross adjusted leverage will be down to about 6.4x at end-2013, (6.7x at end-2012, 3.3x at end-2011), net leverage about 3.5x, and cash from operations/adjusted debt to improve only moderately to less than 15% at end-2013, from 5% at end-2012. These ratios are typically commensurate with the 'B' rating category. Progress in Restructuring The group is well on track with its restructuring actions including plant closures and workforce reduction, and cash-preservation measures. Expected synergies from the alliance with General Motors Company (BB+/Stable) have been confirmed and include logistic, purchasing and product development. Solid Liquidity Immediate liquidity issues are not a concern. PSA reported EUR10bn in cash at end-June 2013, including EUR8.1bn 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 Future developments that may, individually or collectively, 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 Future developments that may, individually or collectively, lead to positive rating action include - The group's automotive operating margins becoming positive on a sustained basis - FCF remaining positive, leading in particular to FFO adjusted gross leverage below 3x Contact: Principal Analyst Tom Chruszcz Director +48 22 338 6294 Supervisory Analyst Emmanuel Bulle Senior Director +34 93 323 84 11 Fitch Ratings Espana S.A.U. 85 Paseo de Gracia 08008 Barcelona Committee Chairperson Frederic Gits Managing Director +33 1 44 29 91 84 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology' dated 5 August 2013 is available at www.fitchratings.com Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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