(The following statement was released by the rating agency)
March 01 - Fitch Ratings has affirmed Peugeot SA’s (PSA) Long-term Issuer Default Rating (IDR) and senior unsecured rating at ‘BB+’ and its Short-term IDR at ‘B’. The Outlook is Stable.
The rating action follows the announcement that PSA will issue shares for a total of EUR1bn which includes General Motors Company (GM, ‘BB’/Positive) purchasing a 7% stake in PSA and forming a long-term alliance.
“The cash inflow from the capital increase will help compensate for expected weak underlying profitability in 2012 and reduce the group’s increasing financial debt while an alliance with GM should generate significant savings in the medium- to long-term,” says Emmanuel Bulle, Senior Director in Fitch’s European Corporates team. “However, this transaction does not address immediate issues such as overcapacity, product positioning and heavy competition and price pressure, and is still subject to execution risk.”
This transaction could yield several benefits to PSA including material savings thanks to the creation of a global purchasing joint-venture and cooperation in product development and platform consolidation. Cooperation should chiefly cover Europe but could also be extended to Latin America and Asia, where both groups have bold targets to grow. An alliance with GM would enable PSA to compensate for its relative small size on a standalone basis compared with close peers benefiting from a higher scale. PSA expects synergies to amount to approximately USD1bn per year for each partner at their peak, within five years.
However, the ‘BB+’ rating continues to reflect PSA’s weak profitability at its automotive division over at least the next couple of years, as cost savings will not accrue in the short-term. Fitch projects PSA’s group operating margins to remain broadly stable around 2.2% in 2012 and increase to more than 3% in 2013, including automotive operating margins strengthening slightly to just less than 0.5% in 2012 and more than 1.5% in 2013, from -0.2% in 2011. The pressing issue of overcapacity in Europe remains unaddressed by this deal whereas fierce competition in PSA’s domestic market will continue to put substantial pressure on revenue and operating profit. Direct competition and model overlap between PSA and GM in Europe, although positive to squeeze development costs, may also have to be addressed.
In addition to the cash inflow from the asset sales already announced by the group, the capital increase will provide further flexibility to finance investments and help reduce financial debt. Fitch projects that net adjusted leverage will improve to 0.7x at end-2012, from 1.5x at end-2011. Fitch views the capital increase and other measures to raise cash as significant steps in the right direction to reduce financial debt and improve key credit metrics but the agency notes that sub-investment grade ratings in the European auto sector are driven more by structurally poor profitability and inevitable deep restructuring and consolidation than by financial ratios.
Pressure on PSA’s current ratings has therefore not entirely disappeared in spite of materially higher headroom in key credit metrics at end-2012 and 2013, according to Fitch’s projections. The agency will closely monitor the impact of recently announced restructuring actions on margins and how they affect the group’s business profile. It will also assess how the launches of new models, including the critical Peugeot 208 this year, can mitigate the sharp sales decline expected in Europe in 2012. In particular, positive rating action could occur if there was a sustainable increase in market share and higher diversification, combined with improved profitability, notably group operating margins trending towards 3% and the automotive division returning to sustained positive profitability.