(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
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
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.
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.
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.
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.
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.
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
- 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
- FCF remaining positive, leading in particular to FFO adjusted gross leverage
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Applicable criteria, 'Corporate Rating Methodology' dated 5 August 2013 is
available at www.fitchratings.com
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Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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