Banque PSA Bonds Lead Declines After S&P Downgrades on Cash Burn

Banque PSA Finance SA bonds led declines in Europe after the funding unit of PSA Peugeot Citroen was downgraded to junk by Standard & Poor’s on concern cash flow is being hurt by slumping car sales.

The lender’s 4.25 percent bonds due 2016 dropped as much as 1.64 cents on the euro to 99.938 cents, the biggest faller in Bank of America Merrill Lynch’s Euro Corporate Index. The cost of insuring debt of Paris-based Peugeot, which was also downgraded, climbed 28 basis points to 701 at 11:48 a.m. in London.

Europe’s second-biggest carmaker reported its first operating loss in three years this week, forecasting industry sales in the region will fall by as much as 5 percent in 2013. Peugeot is burning “a substantial amount of cash” and the company will struggle to break even in terms of cash flow by the end of 2014, according to S&P.

“Investors will be impacted by the downgrade and we should expect the last forced sellers will wake up and sell,’ said Pierre Bergeron, a credit analyst at Societe Generale in Paris.

Peugeot spokesman Pierre-Olivier Salmon said the company was prepared for the downgrade and it won’t affect the bank’s financing, which is secure for the next three years. Banque PSA was cut one step to BB+ while Peugeot was downgraded to BB-, three levels below investment grade.

Bond Sales Slow

European corporate bond sales slowed with non-financial companies issuing 2 billion euros ($2.7 billion) of debt this week, the least this year, data compiled by Bloomberg shows. No new corporate bonds are being marketed in Europe today.

In derivatives markets, the Markit iTraxx Europe Index rose one basis point to 112, while the Markit iTraxx Financial Index of swaps on 25 banks and insurers was little changed at 141 basis points.

Credit-default 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. A basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.