July 25, 2012 / 10:21 AM / in 5 years

TEXT-Fitch cuts PSA to 'BB'; outlook negative

(The following statement was released by the rating agency)

July 25 - Fitch Ratings has downgraded 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 Negative.

The rating action reflects Fitch’s revised expectations for revenue, profitability and underlying cash generation in 2012-2014, following the group’s H112 results and revised guidance for the year. Fitch previously commented that a negative rating action could stem from a sharper-than-expected fall in global sales in 2012, leading to negative operating margins and weaker financial metrics, including FFO net adjusted leverage remaining above 1.5x and/or cash from operations (CFO) on total adjusted debt remaining below 25%.

Fitch now expects PSA’s group revenue to fall by about 6.5% in 2012, including more than 10% at the core automotive division, and industrial operating margin to be negative 0.4% in 2012, from 1.4% in 2011, compared with the agency’s base case in Q112 of approximately breakeven for the year. In particular, Fitch believes that the automotive business could post a negative operating profit of up to EUR1bn in 2012 (about negative 2.5% operating margin), which will not be fully compensated by the better performance of the other divisions (Gefco, Faurecia). Furthermore, Fitch’s revised base case incorporates continuous negative FCF in 2012 and 2013, after an already EUR1.9bn negative FCF in 2011 according to Fitch’s calculation, with FCF probably going back to around breakeven in late 2014 only.

The agency is particularly concerned about the extent of automobile operating losses and cash burn in Europe, stemming from falling revenue and structurally poor cost structure. In addition, contrary to other manufacturers, the group is losing money in several international markets, including Latin America and Russia. PSA posted a EUR662m operating loss at its automobile division in H112 and Fitch expects further losses in H212, albeit lower than in H112, and 2013. Fitch also believes that benefits from the recent launch of the critical Peugeot 208 will be more than offset by the extremely tough operating environment in 2012, including falling demand in PSA’s main markets, increasing competition and significant ongoing pricing pressure.

Fitch acknowledges the various restructuring measures announced by the company but believes that they are still subject to notable execution risk and that their full positive effects could accrue only beyond 2014. Cost saving actions include the expected closure and reorganisation of the factories in Aulnay and Rennes, respectively, by 2014, which will lead to the departure of about 4,400 workers, as well as the lay-off of 3,600 further employees across the group.

The alliance with General Motors Company (GM, ‘BB’/Positive) announced in February 2012 should yield material savings thanks to the creation of a global purchasing joint-venture and cooperation in product development and platform consolidation. However, benefits will only start accruing in 2013 and accelerate in 2014. Reductions in investments including capex and R&D will also have a positive short-term effect on earnings and cash generation, but could impair the quality of the group’s medium- to long-term product offering through lumpier innovation.

The group’s liquidity remains comfortable for the rating category. At end-H112, reported cash and equivalents of EUR7.6bn largely covered EUR2.7bn of short-term debt. Furthermore, negative underlying FCF anticipated in 2012 by Fitch will be compensated by the proceeds expected from the asset disposal programme. Fitch expects PSA to receive more than EUR1.5bn from asset divestitures including rental car business Citer, real estate and a stake in logistics division Gefco. The group’s industrial cash position has also been boosted by proceeds from a EUR1bn capital increase in H112 and a EUR360m special dividend from Banque PSA Finance. As a result, Fitch expects industrial adjusted net debt to decline to approximately EUR4.6bn at end-2012, including adjustments for operating leases, from EUR5.8bn at end-2011, but to creep up again at end-2013 from negative FCF. The extent of future working capital movements adds uncertainty to the exact amount of debt to be reported at the end of each year.

WHAT COULD TRIGGER A RATING ACTION?

Positive: An upgrade is unlikely in the foreseeable future, but the Outlook could be stabilised if the group is on track with its target to improve operating margins and post a positive FCF by end-2014.

Negative: The ratings could be downgraded if the environment continues to deteriorate, leading to further revenue decline at group level and continuous negative operating margins (actual or expected), or if Fitch believes that the group will not be able execute successfully on its plans of returning to a positive FCF by end-2014.

Fitch will also reassess its view on the European auto sector overall within the next two months following a further review of PSA‘s, Renault SA’s (‘BB+'/Stable) and Fiat Spa’s (‘BB’/Negative) current and expected performance and a deeper comparison with close international peers.

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