(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+'
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.
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.
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
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
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.
Positive: Future developments that could lead to positive rating actions
- The group's automotive operating margins becoming positive on a sustained
- FCF remainingpositive, leading in particular to FFO adjusted gross leverage
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
- Further negative FCF in 2015
- Deteriorating liquidity
(Caryn Trokie, New York Ratings Unit)