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TEXT-S&P cuts Peugeot's corp credit rating to 'BB', outlook is negative
July 25, 2012 / 4:10 PM / in 5 years

TEXT-S&P cuts Peugeot's corp credit rating to 'BB', outlook is negative

 (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

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