France Guarantees Peugeot Debt in Exchange for Influence

Peugeot Plans to Raise Bank Credit Line With Government Backing
Peugeot is using up cash as the region’s car market heads for its biggest annual drop in 19 years. Photographer: Alexander Zemlianichenko Jr./Bloomberg

The French government stepped in to rescue PSA Peugeot Citroen, Europe’s second-largest carmaker, by guaranteeing as much as 7 billion euros ($9 billion) in new bonds in exchange for greater influence over company strategy.

The state and workers will each receive a seat on the board of directors, and an outside committee will be set up with veto power over any “significant” changes in Peugeot’s operations, the French Finance Ministry said today.

Peugeot will also not pay any dividends, repurchase shares or provide management board members with stock options as long as the government guarantee is in place, the automaker said. The shares dropped 4.6 percent.

Peugeot needs the French state backing for its banking unit to keep down borrowing costs and offer customers competitive financing rates. Underscoring the urgency of the funding need, the carmaker predicted today that debt is set to increase 20 percent more this year than it forecast in July.

“The state will want to see this business run more in the interest of government, rather than in the interest of the shareholders,” said Erich Hauser, a Credit Suisse analyst with a neutral rating on the shares. “The rising debt of Peugeot clearly shows that the core things are getting worse.”

Shares Drop

Peugeot dropped 27 cents to 5.56 euros at the close of trading in Paris. The stock has plunged 47 percent this year, valuing the carmaker at 1.97 billion euros.

Peugeot is also working with lenders to increase the finance arm’s credit line by 1 billion euros and renegotiate some of the terms of an existing 10.5 billion euros in credit to secure the funding until 2015, Chief Financial Officer Jean-Baptiste de Chatillon said today.

Banque PSA Finance’s 4.25 percent bonds due 2016 rose 0.6 percent to 98.3 cents on the euro, the highest since Oct. 18, according to Bank of America Merrill Lynch’s EMU Corporates index. Credit-default swaps insuring Peugeot’s debt fell 2 basis points to 778 at 4:37 p.m. in London. A fall in credit-default swaps indicates an improvement in credit quality.

The European Commission may scrutinize the guarantee plan under state aid rules if it gives the company an unfair financial advantage. French Finance Minister Pierre Moscovici is discussing Peugeot today at a meeting with European Union Competition Commissioner Joaquin Almunia.

“We haven’t received any formal notification of this issue,” Almunia said at an event in Brussels. “But of course once we will receive information or communication, we will have to create a very careful assessment.”

German Objections

The German state of Lower Saxony, Volkswagen AG’s second-biggest shareholder, said this week it opposes French aid for Peugeot and indicated Germany would ask for a European Commision review.

“It is pretty obvious what would happen,” David McAllister, Lower Saxony’s prime minister and VW supervisory board member, said when asked by Bloomberg whether he’d request a review. “VW and Lower Saxony see these state loans very critically because they won’t help solve the problems that certain European states have with their automotive industry.”

McAllister is a member of Chancellor Angela Merkel ’s Christian Democratic Union party.

“I see that certain of our competitors don’t see it with a friendly eye, but when the terms are presented you’ll see that it’s not state aid, but support,” Chatillon said at a Paris press conference. “This a very strong support from the state but not an aid in the technical sense. There is no reason to have difficulties in Brussels.”

Debt Increasing

Peugeot said net debt at the end of 2012 will rise to about 3 billion euros, up from its July target of 2.5 billion euros, as the European auto market heads for its biggest drop in 19 years. The carmaker, whose nine-month sales in the region dropped 13 percent, said in July it will eliminate 8,000 jobs and close a factory near Paris. Peugeot has also sold assets and issued 1 billion euros in new shares to raise funds.

“The competitive environment is getting tougher, with increased pricing pressure and ongoing deterioration in the markets of southern Europe,” Peugeot said.

The French automaker earlier this year entered into a strategic alliance with General Motors Co. in which GM became the second-biggest stakeholder.

Alliance Developments

Peugeot said today it’s making progress with GM on the alliance and the two have selected four vehicle projects to work on together. The carmakers have also agreed on the next steps in their purchasing cooperation. The two aim to sign detailed contracts for the alliance by the end of the year.

The vehicle projects include a small van for GM’s Opel and Vauxhall brands and a compact crossover for the Peugeot nameplate. A small multi-purpose vehicle will be shared between GM’s European brands and the Citroen marque, Peugeot said.

The two carmakers will also cooperate on a fuel-efficient small-car platform for future GM and Peugeot vehicles in Europe and other markets as well as a program for mid-sized cars. The first vehicles from the cooperation are due to be introduced by the end of 2016. GM and Peugeot expect the cooperation to generate savings of $2 billion annually within five years.

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