Peugeot Bank’s State Guarantee Gets Temporary EU Approval

PSA Peugeot Citroen won temporary European approval for 1.2 billion euros ($1.6 billion) of French-backed bonds and now must justify the state-aid package designed to save the automaker from collapse.

Peugeot’s financing arm, Banque PSA Finance, will be able to sell three-year bonds backed by the French government for the next six months, the European Commission said in a statement today. To obtain final approval, France must submit a restructuring plan within six months to show how Peugeot and the bank unit intend to become profitable without state help.

While France agreed to shore up Peugeot’s ailing banking unit with 7 billion euros in guarantees, it has only asked the EU to authorize the 1.2 billion-euro guarantee so far. Europe’s second-largest carmaker after Volkswagen AG needs the French aid to keep down borrowing costs, which affect the financing rates paid by customers.

“As a French consumer looking for a car, you’re confronted with paying dramatically higher rates of interest to buy a Peugeot on credit than you are a Volkswagen,” said Simon Tilford, chief economist at the Centre for European Reform, a London-based think tank. “I think there will be some latitude shown. There’s a fair degree of understanding for the French government’s position.”

French Contagion

The EU said the guarantee was necessary to ensure the Peugeot unit’s access to financial markets and to avoid any contagion to the French banking system that could affect bank financing. A final decision would cover “all the aid” to the company, Antoine Colombani, spokesman for EU Competition Commissioner Joaquin Almunia, told reporters in Brussels.

“Now one needs to know what the commission will ask in terms of restructuring for the group and this remains unclear,” said Pierre Bergeron, a credit analyst at Societe Generale in Paris. Today’s approval “will allow the bank to pay back this year’s maturities of July and September -- 500 and 750 million euros,” he said.

Peugeot shares climbed 0.5 percent to 6.02 euros as of the close of trading in Paris today. The stock has plunged 56 percent in the last year, valuing the automaker at 2.13 billion euros.

“We’re currently implementing a restructuring plan that will impact the whole group,” said Jean-Baptiste Mounier, a spokesman for the Paris-based company. He said he expects EU regulators to make a final decision on state aid for Peugeot by the summer.

Net Debt

The automaker reports second-half earnings this week. Peugeot said last week that net debt rose in the second half to 3 billion euros from 2.45 billion euros at the end of June.

Peugeot’s plan to eliminate 11,200 jobs and close a factory in Aulnay are on hold after a Paris court said last month that the automaker can’t cut the positions until Faurecia SA, 57 percent-owned by Peugeot, fully informs its workers about the impact of the carmaker’s restructuring. Automakers have announced more than 30,000 job cuts in Europe since July.

Large state subsidies require EU approval and regulators can impose conditions, including asset sales, to counter the advantage that aid gives the company over rivals. EU rules say this can involve withdrawal from loss-making activities, making operations more efficient or diversification toward new and viable operations.

GM, Ford

Europe’s car market is forecast to drop to 12.3 million vehicles this year, 23 percent below the pre-2008 financial crisis peak, IHS Automotive estimates. General Motors Co. is closing a German factory and Ford Motor Co. is shutting three plants across Europe in response. Peugeot’s CFO said last week the market may fall as much as 5 percent this year.

Tilford said the French government was likely to argue that the car industry is facing exceptional circumstances and may attempt more direct support for Peugeot as France and Italy face the brunt of sharp cuts in car-making capacity.

“I don’t think the bailout of the financing arm is the end of this,” Tilford said. “I think there will be further bailouts of car companies in Europe and there will be standoffs between the European Commission and the relevant governments.”

French Budget Minister Jerome Cahuzac last week floated the possibility of the government buying a stake in the automaker after it announced second-half writedowns of 4.13 billion euros.

The cost of insuring Peugeot’s debt against default using credit default swaps fell 14 basis points to 719, according to data compiled by Bloomberg. The contracts reached a record 833 in October last year. The yield premium investors demand to hold Peugeot’s 1 billion euros of 4.25 percent notes due 2016 rather than similar maturity government debt declined 1 basis point to 364 basis points, according to Bloomberg generic prices.

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 a year. 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.