VW Widens Finance Advantage After Fiat, Peugeot Downgrade
Volkswagen AG (VOW) widened its auto financing edge in Europe after Moody’s Investors Service lowered the debt ratings on Fiat SpA (F) and PSA Peugeot Citroen (UG) to six levels below the region’s biggest carmaker.
Fiat and Peugeot both were cut one level to Ba3 from Ba2, Moody’s said today. The ratings service, which rates VW at A3, has a “negative” outlook on the Italian and French companies and said Peugeot’s financing arm Banque PSA Finance is on review for a downgrade.
VW’s financing muscle helps it offer better deals to dealers and consumers. The German carmaker’s share of the European market through August rose to 25 percent from 23.2 percent, while Fiat and Peugeot’s fell, according to the ACEA trade group. Full-year industrywide car sales will drop 8 percent to 10 percent in the region, ACEA said today.
“With sales on a downward trend for the past five years running, most automobile manufacturers are losing money in Europe at the moment,” Fiat Chief Executive Officer Sergio Marchionne, who is also the current ACEA chief, said in Brussels. “The outlook is far from rosy.”
Fiat is burdened by a deteriorating home market and lacks access to funds held by its Chrysler unit to offset cash drain in Europe, Moody’s analyst Falk Frey said. Peugeot’s efforts to shore up its finances “may not be sufficient” with western European vehicle demand poised to fall a further 3 percent next year and pricing pressure increasing, he said.
Peugeot and Fiat have been hard hit by the effects of the European debt crisis on the region’s auto demand, which is set to fall to a 17-year low in 2012. The French and Italian carmakers rely on their home region for the bulk of sales and lack major operations elsewhere to soften the blow.
Moody’s downgrades today affect about 14.9 billion euros ($19 billion) of debt, including about 9.3 billion euros from Fiat debt and 5.6 billion euros from Peugeot, Moody’s said.
Fiat shares dropped as much as 11 cents, or 2.7 percent, to 4.17 euros and traded little changed as of 3:59 p.m. in Milan. Peugeot declined as much as 2 percent in Paris trading.
Peugeot’s 5.625 percent bond in euros due 2017 fell 1.83 cents to 95.23 cents on the euro at 1:19 p.m. in London, the biggest one-day fall since July 16, data compiled by Bloomberg show. The notes’ yield climbed 47 basis points to a one-week high of 6.83 percent.
Fiat’s 600 million-euro 7.75 percent four-year bond dropped the most since July 23, according to data compiled by Bloomberg, declining 1.49 cents, or 1.46 percent, to 101.38 cents on the euro.
The difference in credit ratings means that investors demand about 4.59 million euros more to loan Fiat and Peugeot 100 million euros than VW, according to Bank of America Merrill Lynch bond indexes.
“The downgrade doesn’t reflect Fiat’s financial conditions globally,” Marchionne said in an interview at the event. “They highlight an issue that impacts the whole industry, not just Fiat.”
Car demand in western Europe will probably remain below pre-crisis levels until at least 2019, Volker Krueger, an analyst with LMC Automotive, said today at an event in Paris. The International Monetary Fund cut its global growth forecast yesterday and warned of even slower expansion should European officials fail to address threats to their economies.
Peugeot, which was already cut to three levels below investment grade by Fitch Ratings last month, has agreed to sell a 75 percent stake in its Gefco trucking unit to raise cash as it burns through about 200 million euros a month. The Paris-based manufacturer’s credit grade was cut by all three main rating services in July after the company reported a 662 million-euro first-half loss at its automaking unit.
Peugeot’s downgrade may soon trigger a further lowering of its fully-owned banking unit Banque PSA Finance, or BPF.
“I’m expecting the downgrade to happen very shortly, as Moody’s made it clear that it would keep its two-notch gap between BPF and PSA,” Pierre Bergeron, a credit analyst at Societe Generale, said by phone. “The move would increase financing costs of BPF and hit its operational margin.”
BPF’s downgrade to one level below investment grade would narrow its pool of investors, as mutual funds may shy away from high-yield investment, Bergeron said.
Peugeot is determined to retain full control of BPF, dismissing calls by bondholders to sell a stake. Chief Financial Officer Jean-Baptiste de Chatillon said in an interview that the auto lender can boost funding through securitization in the event of a downgrade.
Moody’s said that the bank’s “creditworthiness is inherently linked” to Peugeot’s because of “intricate strategic, commercial and financial ties.”
Marchionne today declined to confirm a target to break even in Europe by 2014, saying that he will give a “new view” by the end of October.
Earlier this week, Marchionne said the Turin-based manufacturer will lower its forecast for the European auto market when updating its five-year plan at the end of the month. Fiat is set to lose 700 million euros in the region this year.
To tighten its control of Chrysler Group LLC and eventually gain access to its cash, Fiat asked a U.S. court to confirm the price it has to pay the United Auto Workers retiree health fund for an additional 3.3 percent in the third-largest American carmaker. Fighting over these small slices may be Fiat’s only option, as buying the rest of Chrysler at once could stress the Italian company’s finances further.
“If they do it in one go, this would be a negative development that may have negative rating implications,” Eric Tanguy, director of corporate ratings for Standard & Poor’s in Paris, said yesterday at an event in Frankfurt.
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