Peugeot Bank Unit Cut to Junk by S&P on Europe Car Market

PSA Peugeot Citroen’s bank division was cut to junk by Standard & Poor’s Ratings Services in a blow to French state-backed efforts by Europe’s second-biggest carmaker to limit the effects of falling sales on the loan unit.

The Banque PSA Finance unit was cut one step to BB+, or one level below investment grade, the credit-rating company said in a statement yesterday. Peugeot’s debt was also lowered one step to BB-, or three levels below investment grade, S&P said in a separate statement. The outlook for both the carmaker and the bank is negative, meaning S&P may downgrade their debt again.

France’s government provided guarantees last year for as much as 7 billion euros ($9.3 billion) in Banque PSA Finance’s new bond sales as Paris-based Peugeot sought to maintain the unit’s investment grade at Moody’s Investors Service amid a contraction in Europe’s car market. Peugeot reported its first operating loss in three years on Feb. 13, when it said industry sales in Europe will fall 3 percent to 5 percent this year.

“In light of continually stiff competition in its core markets, Peugeot is unlikely to generate break-even free operating cash flow before the end of 2014,” a goal the carmaker outlined when reporting earnings, S&P said. The bank unit was downgraded in line with Peugeot’s debt-rating cut because it depends on the parent company for business, it said.

A non-investment grade for the bank has the potential to raise its borrowing costs, hurting the division’s ability to offer low-cost car loans.

Moody’s View

Moody’s may lower the debt rating at Peugeot and subsidiaries because the loss in 2012 was wider than the credit-rating company had estimated, while Europe’s car market remains “challenging” because of falling sales and price competition, Rainer Neidnig, an analyst, said today in a statement.

Peugeot was “prepared” for a downgrade, and “this doesn’t impact the financing conditions of the bank, because its financing is secured over the next three years,” Pierre-Olivier Salmon, a spokesman at the carmaker, said by phone. “Today, Banque PSA Finance is protected against any downgrade from the ratings firms.”

Peugeot rose as much as 1 percent and was trading up 0.4 percent at 6.40 euros at 1:30 p.m. in Paris, the highest since Jan. 17, based on closing prices. The stock, which declined earlier today, has gained 17 percent this year, valuing the manufacturer at 2.27 billion euros.

EU’s Demand

European Union regulators granted temporary approval for 1.2 billion euros of the French state guarantees on Feb. 11, saying Peugeot must propose a reorganization plan within six months to outline how it can survive without government help.

In addition to the state guarantees, Banque PSA Finance reached an 11.5 billion-euro refinancing agreement in December with a pool of about 20 banks.

Industrywide European auto sales fell 7.8 percent in 2012, with Peugeot’s deliveries dropping 13 percent, according to the Brussels-based ACEA trade group.

Peugeot reported a loss before interest, taxes and one-time gains or costs of 576 million euros in 2012 compared with recurring operating profit of 1.09 billion euros a year earlier. It pledged on Feb. 13 to cut its cash-consumption rate 50 percent in 2013 and reach the break-even level by 2014 after burning through 3 billion euros last year.

The carmaker plans to reduce its French automotive workforce by 17 percent in the next two years, and it’s shutting a car plant in Aulnay, on the outskirts of Paris.

Aulnay Transfers

Peugeot and 18 of its labor-union representatives signed an agreement today on the terms of transferring employees affected by the shutdown to a plant in Rennes, and the company is sticking to plans to continue production at Aulnay until 2014, Denis Martin, head of Peugeot’s industrial operations, said today at a press conference.

The carmaker cut spending by 1.18 billion euros in 2012, beating a reduction target of 1 billion euros, and asset sales totaled 2 billion euros, one-third more than budgeted, Peugeot said yesterday.

Moody’s may downgrade Peugeot’s debt in the event the credit-rating company determines that revival efforts “are likely to fall short of yielding its targeted results, including a clear path toward break-even operational free cash flow by the end of 2014,” Neidnig said.

(Updates with labor agreement in 14th paragraph.)
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