(The following statement was released by the rating agency) Overview
-- European carmaker Peugeot's first-half 2012 results showed further deterioration against the lackluster ones already reported for second-half 2011.
-- The company is burning substantial cash flow in its core automotive operations, leaving little prospect in the coming 18 months of credit ratios being commensurate with its previous ratings.
-- We are lowering our long-term rating on Peugeot to 'BB' from 'BB+'.
-- The negative outlook reflects a number of risks related to the announced disposals and restructuring plans and possible side impacts in terms of Peugeot's market positioning in the currently depressed, cyclical, and highly competitive European auto industry. Rating Action On July 25, 2012, Standard & Poor's Ratings Services lowered to 'BB' from 'BB+' its long-term corporate credit ratings on France-incorporated European auto manufacturer Peugeot S.A. (PSA) and related entity GIE PSA Tresorerie. At the same time, we affirmed our 'B' short-term ratings on the companies. The outlook is negative. We have also lowered to 'BB' from 'BB+' our issue rating on the senior unsecured notes issued by PSA and GIE PSA Tresorerie. The recovery rating on these notes is unchanged at '3', indicating our expectation of meaningful (50%-70%) recovery in the event of a payment default. Rationale The downgrade reflects our expectation that Peugeot's credit ratios will be below the target ratios commensurate with its previous ratings in the coming 18 months and that the business environment for European volume automakers is not showing any signs of recovery. The company's release of its first-half results confirms that PSA is burning substantial cash in its core automotive operations on the back of an ongoing very weak European auto market. In our base-case scenario for 2012, we foresee the company generating negative free operating cash flow (FOCF), purely from operations, of about EUR2.0 billion this year, with only a limited improvement expected for 2013, when the main cash impact of recently announced restructuring measures will be felt. In our view, the company's ability to stabilize debt this year and next will rely primarily on one-off corporate measures like divestments or the recent equity increase subscribed by General Motors Corp. (GM, BB+/Stable/--). In our base case, we anticipate that PSA's revenues will fall by several percentage points in 2012 primarily on steep declines in vehicle unit sales in several European countries, including France, Italy, and Spain. Europe still contributed 58% to PSA's unit sales in 2011. Overall for the year, PSA's unit sales may fall by more than 10%, with a 13% effective decline already experienced year on year during the first half. In our base case for full-year 2012 and in light of the EUR662 million loss PSA's automotive operations already generated during first-half 2012, we expect these operations to report a recurring operating loss in excess of EUR1 billion. This is likely to be only partly offset by earnings made by PSA's captive finance subsidiary, Banque PSA Finance and the company's main industrial subsidiary, Faurecia, from which we expect steady earnings contributions this year. Overall, we expect that it will be difficult for PSA to break even at the EBIT level in 2012. We note for instance that the company's European capacity utilization rate is at an all-time low of 76%. In addition, while sales outside Europe are growing, this has so far failed to translate into any substantial positive impact on consolidated operating earnings for the automotive division. We consider that PSA's recently weak operating performance will likely continue in 2013 as a result of its high operating leverage, the cash impact of restructuring charges, and continuing stiff competition in its European home market. Under our base-case scenario, the group's core automotive operations will still report substantial negative operating earnings in 2013, in a European car market that we expect to remain sluggish following the 7% drop likely to be experienced this year. We consequently anticipate that PSA will at best maintain its ratio of funds from operations (FFO) to Standard & Poor's-adjusted debt at about 20% by year-end 2013, factoring in some real moderation in capital expenditures (capex) from the 2011 high, no dividends, and no adverse working capital swings. Under our base case, we foresee PSA deleveraging in 2012 only in case of high asset disposals, and we also expect the company to be unable to break even in FOCF terms before 2014. Liquidity The short-term rating is 'B'. We view PSA's liquidity profile as adequate under our criteria, based on our projection that the ratio of potential sources to uses of liquidity will exceed 1.5x in each of the coming two years. The company's financial flexibility and liquidity are underpinned by:
-- Cash and cash equivalents of EUR7.6 billion in the industrial division at end-June 2012, of which we view EUR2.0 billion as necessary to maintain ongoing operations.
-- Unused company credit lines, notably a EUR2.4 billion committed syndicated bank line of which EUR2.2 billion matures in July 2015 and EUR0.2 billion in July 2014. These liquidity sources compare with EUR2.5 billion of short-term debt borne by the industrial division and maturing within 12 months as of June 30, 2012. Although the company benefits from an extended debt maturity profile, repeated negative free cash flow from operations would ultimately take a toll on the company's liquidity position. In the medium term, we would expect measures to limit capital investment and contain costs in the troubled European market to mitigate the risk of more substantial cash uses than PSA can fund so as to maintain adequate liquidity. Recovery analysis We have revised the issue rating on the senior unsecured notes issued by PSA to 'BB', in line with the corporate credit rating on the group. The recovery rating on these notes is maintained at '3', indicating our expectation of meaningful (50%-70%) recovery in the event of a payment default. The recovery rating on the notes is underpinned by the company's substantial enterprise value based on its good market positions and its extensive product range with well-recognized brands. The recovery ratings are constrained at the '3' level by the unsecured nature of the notes, the possibility of capital structure changes on the path to default, and the relatively unfriendly jurisdiction for creditors in France. In line with our criteria to calculate recovery, we have simulated a hypothetical default scenario for Peugeot. Such a hypothetical default would most likely result from overall economic deterioration and declining car sales. Under our simulated scenario, we assume a default in 2016 based on the above factors. We estimate the stressed enterprise value of the group's automobile division at the point of hypothetical default at about EUR9.8 billion. As part of our valuation approach, we applied haircuts to asset values, taking into account balance sheet shrinkage under a default scenario and forced sale values. This is because we believe that stressed balance sheet asset values provide a good indicator of the enterprise value at default. In line with our captive finance methodology, we have not included in our analysis PSA's wholly owned finance subsidiary, BPF. We have also assumed that the existing committed facilities would be maintained on an unsecured basis until the point of default and would be fully drawn at that time. In addition, we have assumed that all existing debt maturing in t