July 30 (Bloomberg) -- PSA Peugeot Citroen won European Union approval for the French government to guarantee 7 billion euros ($9.28 billion) in bonds for its banking unit.
In return for the EU approval, Europe’s second-largest carmaker agreed to curb its debt levels and faces restrictions on acquisitions. Shares advanced as much as 5.6 percent in Paris trading and were up 4 percent to 9 euros when markets closed, a 14-month high.
“We have arrived at a formula which allows PSA to restructure in accordance with clear limits, reducing to a minimum the damaging effects for competitors who have not received support from public funding,” Joaquin Almunia, EU competition commissioner, said in a statement. “This is a balanced result which offers the PSA group the chance to make a new start on a sound basis.”
The French government offered to guarantee the bonds for Peugeot’s finance arm to help the carmaker keep down borrowing costs, which is key to offering loans that are competitive with rivals such as Volkswagen AG. Peugeot consumed 3 billion euros in cash in its automotive unit last year and is working to reduce losses amid a sixth straight annual decline in the European auto market.
The commission, which checks whether government aid is in line with EU competition rules, in February gave temporary approval for the state to guarantee 1.2 billion euros of bonds at BPF, which the carmaker’s finance arm successfully sold in March.
“This is of course very good news for Peugeot,” Florent Couvreur, an analyst at CM-CIC Securities who recommends selling the shares, said by phone. “By helping out Peugeot’s bank, the French state is effectively helping the whole company. But the EU Commission considered this didn’t constitute a distortion of competition.”
Peugeot, which is reporting first-half earnings tomorrow, said that the commission’s approval was required for any acquisition exceeding 100 million euros a year by the manufacturer or any of its subsidiaries.
Peugeot also pledged to make the group “return to viability,” it said in a statement and that it would take “appropriate measures” if net debt exceeds a certain limit.
Peugeot also said its banking unit pledged not to reduce the spread currently applied to wholesale financing for Peugeot and Citroen dealers. The company’s commitments will remain in effect until the end of 2015.
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