Peugeot Battles Cash Crunch as European Slump Continues

PSA Peugeot Citroen (UG), the carmaker most exposed to slumping European auto demand, will probably see its cash cushion shrink in 2013 with industrywide sales in the region due to contract for the sixth straight year.

Peugeot will run through about 1.7 billion euros ($2.2 billion) of its 8 billion euros in cash reserves in 2013, according to estimates by CM-CIC Securities analyst Florent Couvreur. The burn rate may bring the carmaker closer to a liquidity crunch as its market share erodes further.

“The news flow is not heading in the right direction,” said Eric Tanguy, director of corporate ratings for Standard & Poor’s in Paris. The French carmaker’s “full-year sales were below what we had in mind.”

Peugeot has been harder hit by the sovereign-debt crisis than other European competitors because it lacks major international operations to soften the blow at home. The region’s car market is forecast to drop to 12.3 million vehicles this year, 23 percent below the pre-crisis peak, according to IHS Automotive. The Paris-based carmaker’s share is set to slump to 11.8 percent from 12.8 percent in 2007.

Peugeot’s shares have dropped 46 percent over the past 12 months, the only decliner among the 14 companies in the Stoxx 600 Automobiles and Parts Index in that period.

Shares Fall

Peugeot fell as much as 3.7 percent to 6.08 euros today and was down 3.4 percent as of 1:59 p.m. in Paris trading, valuing the company at 2.16 billion euros.

The French carmaker, Europe’s second-largest, delivered 17 percent fewer vehicles last year, with the drop worsening in the fourth quarter. Its push abroad with cars like the low-cost Peugeot 308 sedan failed to insulate the company from what Fiat SpA (F) Chief Executive Officer Sergio Marchionne called Europe’s “Carmageddon.”

Peugeot’s European deliveries, which accounted for 62 percent of its global sales last year, may fall 4 percent to 1.5 million cars this year, according to IHS. The renewed drop will put a further strain on finances.

Peugeot’s 5.625 percent bonds in euros due 2017 fell 0.1 percent to 103.45 cents on the euro at 12:51 p.m. in London, Bloomberg Bond Trader prices show. That pushed the notes’ yield to a one-week high of 4.75 percent.

Negative Outlook

Standard & Poor’s defines adequate liquidity as having funds to cover 120 percent of expected spending, including debt payments and planned expenditures on factories and vehicle development, over the coming 12 months. The rating company estimates Peugeot’s spending at about 6 billion euros, based on figures from the first half of 2012.

Including credit lines, Peugeot’s liquidity stands at about 10 billion euros. That gives the Paris-based carmaker a buffer of about 2 billion euros before cash falls below Standard & Poor’s threshold. S&P has a BB rating on Peugeot’s long-term debt, two steps below investment grade, with a negative outlook.

Moody’s Investors Service and Fitch Ratings have Peugeot at three levels below investment grade with a negative outlook. That situation has weighed on the financial profile of its banking unit Banque PSA Finance, or BPF, whose rating at Moody’s is one step above junk.

The bank’s drop to non-investment grade would push up borrowing costs for buyers of Peugeot vehicles, making the carmaker less competitive.

State Support

The French government agreed in October to support BPF by offering 7 billion euros in guarantees for new bonds. As part of the effort to shore up the bank’s finances, BPF is finalizing agreements with a pool of about 20 banks on a 11.5 billion-euro refinancing package, spokesman Jean-Baptiste Mounier said today by phone.

To boost funding, Peugeot sold assets last year including its headquarters building, a majority holding in trucking unit Gefco and a 7 percent stake to General Motors Co. (GM) as part of a partnership. The company is also cutting 550 million euros in automotive spending and plans to close a factory near Paris.

Still, Peugeot’s plight isn’t as severe as the crisis it survived in the 1980s, when it slashed about 40 percent of its workforce to stave off bankruptcy, said Jean-Louis Loubet, a historian and author of a book on the Peugeot family. The manufacturer also now has the French government on its side, which has taken a seat on the company’s supervisory board as part of the guarantee deal.

“Going bankrupt is not an option,” said Sascha Gommel, an analyst at Commerzbank AG in Frankfurt. “The French government will do something in the end.”

Global Challenge

As part of its turnaround effort, Peugeot plans to sell more cars this year as the global auto market expands 3 percent to 4 percent this year, Frederic Saint-Geours, the carmaker’s head of brands, told journalists yesterday.

Peugeot may struggle to win back consumers from Volkswagen AG (VOW) and Hyundai Motor Co. (005380), which have both made inroads in France. Peugeot’s sales tumbled 18 percent in its home country, outpacing the total market’s 14 percent drop. VW slipped 5 percent, while Hyundai’s deliveries surged 28 percent, according to French trade group CCFA.

Peugeot’s penchant for discounting to keep assembly lines moving has sullied its reputation, said Arnaud Slamani, a Citroen dealer in Paris.

When people shop for a Peugeot, they’re “looking at the price,” while buyers are willing to pay more for a Volkswagen, said Slamani. “That’s where the German image plays a role.”

Getting Squeezed

That leaves Peugeot squeezed in the crowded mid-market, without a budget offering to compete with Renault SA (RNO)’s Dacia or a luxury line like Volkswagen’s Audi to generate profits. As a result, further closures may be needed to raise utilization rates at European factories to a profitable level, according to JPMorgan analyst Jose Asumendi.

Peugeot, along with closing the plant in the Paris suburb of Aulnay, aims to shrink its French automotive operations by 11,200 positions, or 17 percent, over the next two years. Shrinking its workforce won’t be enough.

“At the moment, it’s difficult to have a perspective for the business model,” said Commerzbank’s Gommel. “There’s no example in the past where a mass carmaker was successful by reducing its capacity.”

To contact the reporter on this story: Mathieu Rosemain in Paris at mrosemain@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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