November 29, 2016 / 3:26 PM / a year ago

Fitch Upgrades Peugeot S.A. to 'BB+'; Outlook Stable

(The following statement was released by the rating agency) BARCELONA/LONDON, November 29 (Fitch) Fitch Ratings has upgraded 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 Stable. The upgrade reflects our expectation that the improvement in PSA's key credit metrics, reflected in the solid results posted by the group in 2015, is sustainable. We view PSA's financial profile as being in line with a low investment-grade rating but believe that the rating remains constrained by a business profile more adequately positioned at the high end of the 'BB' category. In particular, the group remains reliant on Europe and has a modest global scale. KEY RATING DRIVERS Successful Restructuring Measures to streamline the product portfolio, to improve pricing power and profitably expand global operations, as well as cash-preservation and cost-reduction have reduced the breakeven point and will further support profitability. PSA's automotive operating margin increased to 5% in 2015 from 0.2% in 2014 and Fitch projects it will remain above 4.5% through to 2018. Positive FCF We expect PSA's FCF margin to remain above 2% in the foreseeable future. PSA's free cash flow (FCF) margin increased significantly to 4.5% in 2015 from 1.8% in 2014, supported by stronger underlying FFO, a EUR0.6bn material inflow from working capital, including Fitch's adjustments for factoring, and contained capex. We expect a potential moderate reversal in working capital in 2016, a gradual and modest increase in investments and the resumption of dividend payments from 2017 to weigh on cash generation. Lower Leverage Since 2013, indebtedness has been sharply reduced, due to positive FCF, the issue of warrants, and the creation of JVs with Santander Consumer Finance, releasing cash from Banque PSA Finance and paid as dividends to PSA. We expect FFO adjusted net leverage to decline further and become negative from about zero at end-2015. Product Pipeline Drives Recovery The group's strategy includes a smaller product range and stronger pricing. This could hinder substantial volume growth, although it should support the group's pricing power, investment focus and profitability. However, we expect the launch of several new products from late 2016 to mark the start of a more aggressive product offensive, boosting top line growth and further supporting operating profit in the next two to three years. Weak Competitive Position PSA's sales remain biased toward the European market, and the mass-market small and medium car segments where competition and price pressure are most fierce. This is in spite of recent consistent increases in sales. Competition is also intensifying in foreign markets into which PSA has diversified, including Latin America, Russia and China. Capital Increase The French state and Dongfeng Motor have become the largest shareholders in PSA, in line with the Peugeot family, each with a 13.7% stake. The capital increase has benefited the financial profile but the new shareholding structure may present some challenges in meeting the potentially divergent interests of the various shareholders. DERIVATION SUMMARY PSA's financial credit profile has improved materially over the past two years, with credit metrics now consistent with a low investment grade company and in line with higher-rated manufacturers. However, the group's competitive position is weak compared with global peers. Sales remain biased toward the European market and the mass-market small and medium car segments, where competition and price pressure are most fierce. No country-ceiling, parent/subsidiary or operating environment aspects impact the ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: -Industrial operations' revenue growth stable in 2016 before accelerating to 3%-5% in 2017-2018; -Auto operating margin remaining between 5%-5.5% through to 2018; -Capex to increase to about EUR3.3bn-3.5bn; -Moderate working capital outflow in 2016, neutral in 2017-2018; -Slight increase in dividends received from JVs in China and dividend payment to PSA shareholders to resume in 2017; -Dividends and further release of equity from the JV between Banque PSA Finance and Santander Consumer Finance of about EUR1bn between 2016 and 2018. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Larger scale and further diversification in sales, combined with a sufficient track record or confidence that the company can meet the achieve automotive operating margins above 4%; FCF above 2% and FFO adjusted net leverage below 0.5x. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Automotive operating margins below 2% -FCF below 1% -FFO adjusted net leverage above 1.5x -Cash flow from operations/adjusted debt above 30% LIQUIDITY Sound Liquidity Liquidity remains healthy, including EUR10.8bn of readily available cash and securities for its industrial operations at end-June 2016, including Fitch's adjustments of EUR2bn for not readily available cash and marketable securities. In addition, committed credit lines of EUR4.2bn, including EUR1.2bn at Faurecia, were undrawn at end-June 2016. Contact: Principal Analyst Thomas Corcoran Associate Director +44 20 3530 1231 Supervisory Analyst Emmanuel Bulle Senior Director +34 93 323 84 11 Fitch Ratings Espana S.A.U. Av. Diagonal 601 08028 Barcelona Committee Chairperson Paul Lund Senior Director +44 20 3530 1244 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. Summary of Financial Statement Adjustments -Fitch adds an 8x multiple of leases, totalling EUR1.7bn, to debt in line with its methodology. -Fitch adjusts year-end cash balances by EUR1.4bn to account for operational cash requirements and seasonal working capital. -Derecognised receivables of EUR1.9bn are added to debt Additional information is available on www.fitchratings.com. 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