Bloomberg News

Peugeot Falls to 23-Year Low on Possible Government Role

July 13, 2012

PSA Peugeot Citroen (UG) plunged to a new 23-year low over concerns that the French government may step in after Europe’s second-largest carmaker announced plans to close a factory and cut jobs.

Peugeot dropped 54 cents, or 7.7 percent, to 6.48 euros in Paris trading today. The stock has plummeted 76 percent in the last year, valuing the French carmaker at 2.3 billion euros ($2.8 billion).

Moody’s Investors Service today placed its Peugeot rating on review for a possible downgrade, a day after the carmaker said it will close the first auto factory in France in 20 years and cut a total of 14,000 jobs to stem mounting losses. Industry Minister Arnaud Montebourg said the government doesn’t “accept the plan as it is.” Prime Minister Jean-Marc Ayrault called the closing and workforce reductions a “true shock.”

“You get headlines that the French government might not be entirely happy with the plan that Peugeot has presented here,” said Erich Hauser, a Credit Suisse analyst in London with an underperform recommendation on the shares. “That leaves the shareholders in a very vulnerable position and makes it increasingly likely that you need some sort of government support. The risk is definitely on the side of shareholders.”

Peugeot’s bonds fell the most of any corporate security in the Markit iBoxx Euro Corporates Non-Financials index. The carmaker’s 4.25 percent bonds due 2016 fell 2.9 euro cents today to 96.03 cents on the euro, extending the week’s decline to 3.5 percent, according to data compiled by Bloomberg.

Cash Burn

Credit-default swaps on Peugeot jumped 28 basis points today to 757, near the record 777 set June 27 and up from 400 in March. 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.

Peugeot has been consuming about 200 million euros in cash monthly since the middle of last year, and has a target of restoring operating cash flow to a break-even level by the end of 2014, the company said yesterday. The first-half operating loss at the automotive unit will reach 700 million euros compared with profit of 405 million euros a year earlier.

Capacity utilization at Peugeot’s factories in the period dropped to 76 percent from 86 percent a year earlier. Overcapacity in western Europe may more than double to about 2 million vehicles in 2012, according to research company IHS Automotive.

Rising Overcapacity

Moody’s, which rates Peugeot one level below investment grade at Ba1, said the decision to place the Paris-based carmaker on watch for a possible downgrade was “triggered by a deterioration in the company’s already weak capacity utilization of its European plants in the first half of 2012, resulting in a high cash-burn rate.”

“If Peugeot were downgraded by one notch, it would most probably trigger a downgrade for its bank,” Anne-Barbara Nicco, a fixed income analyst at Oddo Securities, said by phone. “The bank would remain rated in the investment grade category, but with higher financing costs. But that wouldn’t be the end of the world. Peugeot is able to keep a comfortable liquidity situation to finance any cash burn until the end of next year at least.”

Peugeot sold 1 billion euros in new stock to existing shareholders this year and plans to sell 1.5 billion euros in assets to raise cash and lower its debt load. Peugeot is planning to sell a majority stake in its profitable Gefco trucking unit, Luc Nadal, the unit’s chief, said this week. Peugeot aims to complete the sale by October, he added.

Asset Sales

Asset disposals thus far have included the Citer vehicle- rental unit that the carmaker sold to Enterprise Holdings Inc. on Feb. 1 for 440 million euros and an agreement announced April 2 to sell Peugeot’s 48-year-old headquarters building in Paris to Ivanhoe Cambridge for 245.5 million euros.

“You can easily calculate with these items that the level of financial security has been improved in the first half,” Jean-Baptiste Mounier, a Peugeot spokesman, said in an email. “It is more than sufficient to cover our financial needs and will largely also cover the cost of restructuring.”

Peugeot’s first-half deliveries slumped 13 percent, in contrast to an 8.9 percent increase in group sales reported today by Volkswagen AG (VOW), Europe’s biggest carmaker, which was bolstered by Asian and U.S. growth.

Slumping Market

Europe’s auto market, which peaked in 2007, may not recover to pre-recession levels until 2018, Renault (RNO) SA sales chief Jerome Stoll said on July 11, when he scrapped the French carmaker’s target range for sales growth in 2012. Renault is still predicting it will deliver more vehicles this year than last because of growth outside Europe.

“What’s happening at PSA doesn’t take us by surprise,” French President Francois Hollande said in an interview published today by Le Monde newspaper. “It’s not up to me to call a meeting at the Elysee Palace,” his residence and office. “It’s the role of the concerned ministers to be socially involved.”

Chief Executive Officer Philippe Varin said in an interview on RTL radio today that he’s ready to “open the books” to the government to show that French labor costs are too high. Another round of car-scrapping incentives isn’t the answer, Varin said. The CEO said yesterday at a Paris press conference that seeking state help is “not on the agenda.”

To contact the reporter on this story: Mathieu Rosemain in Paris at mrosemain@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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