Peugeot Has 51% Chance of Debt Default, Credit Swaps Show

PSA Peugeot Citroen bond-insurance costs surged to a record, trading as if the French automaker has a 51 percent chance of defaulting as it cuts thousands of jobs and closes a plant.

Credit-default swaps on the carmaker’s debt jumped 50 basis points to an all-time high of 800 basis points at 4:30 p.m. in London, Bloomberg swaps prices show. The contracts have doubled since March and now signal a 51 percent probability of default within five years. Caroline Brugier-Corbiere, a spokeswoman for Peugeot, declined to comment.

Europe’s second-largest carmaker announced plans to close a French factory and eliminate a total of 14,000 jobs. Peugeot is burning through 200 million euros ($244 million) of cash each month and Moody’s Investors Service placed its Ba1 rating, already junk, on review July 13 for a possible downgrade. Peugeot’s manufacturing and sales organizations had financial assets and undrawn credit facilities of 9.6 billion euros as of December 31, the last date for which they provided full data.

Peugeot’s cash reserves allow it to “survive for one to two years,” said Xavier Caroen, a Zurich-based Kepler Capital Markets analyst who has a “hold” rating on the company. “We hope the French government lets them cut production and shut some sites in France, or they won’t have any earnings in the future,” Caroen said.

Widening Losses

French President Francois Hollande, elected in May after pledging to block a “parade of firings,” said July 14 he would lean on Peugeot to rework the plan intended to stem losses and trim production capacity. The government will report the findings of a review later this month, as well as measures to prop up the French auto sector.

Peugeot said last week its automotive division will post a first-half operating loss of 700 million euros compared with a profit of 405 million euros a year earlier. Peugeot is selling assets, including a stake in its profitable Gefco trucking unit to raise cash. The Paris-based automaker earlier this year also issued 1 billion euros in new stock to existing shareholders.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros annually. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The shares dropped 44 cents, or 6.8 percent, to 6.04 euros in Paris trading today. The French company has declined 77 percent in the last year, valuing it at 2.14 billion euros.

Peugeot formed a strategic alliance this year with General Motors Co. in which the American carmaker took a 7 percent stake to become the second-largest shareholder after the founding family. The two plan to work on joint development and purchasing to reduce costs. GM is also planning to close a factory in Germany.