Bloomberg News

Peugeot’s Finance Unit May Get French Government Lifeline

October 17, 2012

PSA Peugeot Citroen (UG), whose shares plummeted 60 percent in the last year as car sales plunged, may get a funding lifeline from the French government for its finance arm, a move that would amount to an indirect bailout of the crisis-hit automaker.

“The state is examining the possibility of lending its support, with conditions and amounts remaining to be determined,” Finance Minister Pierre Moscovici said today in Paris. “I’ve already called the French major banks to meet on this subject.” The shares advanced 4.1 percent on the news.

Peugeot is talking with the government about a loan for its finance unit from a syndicate of banks that would be guaranteed by the state, a person familiar with the matter said. They aim to reach an agreement yet this month, said the person, who asked not to be identified discussing private negotiations.

The carmaker is using up cash as the European auto market heads for its biggest annual decline in 19 years. Peugeot, whose nine-month sales in the region dropped 13 percent, is cutting 8,000 jobs and closing a factory near Paris. The French automaker has also sold assets and raised 1 billion euros through a share sale to bolster its finances.

“It shows two things; first, that the state is there to keep them up and running,” said Arndt Ellinghorst, head of the automotive analysis team at Credit Suisse in London. “The flip side is, I’ve never seen a carmaker whose financial services is getting to a stage where it really cannot refinance.”

Credit Lines

Banque PSA Finance, which Peugeot relies on to provide loans to customers and dealers, has 5.76 billion euros ($7.56 billion) in credit lines from banks maturing in the next two years, according to Peugeot’s first-half earnings report.

Peugeot is looking for ways to provide the unit “with a level of financing sufficient to ensure the continued smooth functioning” of operations, said Jean-Baptiste Mounier, a Peugeot spokesman.

The continued review of Peugeot’s financing arm for a possible downgrade by Moody’s Investors Service could lead the bank to be rated junk. A non-investment grade rating for the bank would increase borrowing costs and as a result worsen financing conditions for customers and dealers. Peugeot’s goal is a solution that allows it to continue providing competitive car loans and keep its dealer network intact, Mounier said.

VW Edge

French buyers pay as little as 1.9 percent annual interest on 10,000 euros in financing from Volkswagen AG (VOW), the company says. From Peugeot, the same loan would cost around 11.6 percent annually, according to the automaker’s website. Renault SA (RNO) says it charges 5.9 percent. VW and Renault declined today to comment on the potential government assistance for Peugeot’s bank.

Because of Peugeot’s higher refinancing costs compared to competitors, “it becomes more expensive to own a 208 than a BMW 3-Series in terms of cash payments for consumers,” Ellinghorst said. “That’s just putting you in a competitive position that is completely unsustainable.”

Peugeot gained 24 cents to 6.03 euros today at the close of trading in Paris, valuing the automaker at 2.14 billion euros.

Banque PSA Finance’s 4.25 percent bonds due in 2016 jumped 3 percent to a four-month high of 99.9 cents on the euro, one of the biggest climbers in Bank of America Merrill Lynch’s EMU Corporates index.

Liquidity

Credit-default swaps insuring Peugeot’s debt dropped 76 basis points to 695 at 4:42 p.m. in London, the lowest since Sept. 19 and the largest daily drop since Feb. 28. A decline in credit-default swaps indicates an improvement in credit quality.

The banking unit has enough liquidity to operate for more than six months, Mounier said, adding that no final solutions have been agreed upon yet for Peugeot’s financing arm.

The European Commission may scrutinize the plan under state aid rules if it gives the company an unfair financial advantage over rivals. Ford Motor Co. (F:US) said it will also be watching to see what sort of aid is offered by the French.

“We would expect that any support from governments to carmakers does not distort the level-playing field in Europe and free and fair competition in the auto industry,” Adrian Schmitz, a Ford spokesman, said in an emailed statement.

Credit Lines

Banque PSA credit lines maturing in 2013 and 2014 don’t have financial covenants, according to Peugeot’s first-half report, which gives the bank financial flexibility to incur more debt and have higher interest costs even when cash flows are falling.

The bank’s creditworthiness is “inherently linked” to that of Peugeot’s “given the intricate strategic, commercial and financial ties” between the two, Moody’s said July 27, after cutting the banking unit to its lowest investment grade. Moody’s cut Peugeot on Oct. 10 to Ba3, which is three levels below investment grade. The service said last week that the bank’s rating is under review.

“We’re keeping a close eye on any concrete element that could impact the creditworthiness of BPF,” said Roland Auquier, an associate analyst at Moody’s banking team. “There’s no mechanical effect between a downgrade of the parent company and that of BPF, although Moody’s typically would not rate a captive institution more than two notches higher than its industrial parent.”

Peugeot is determined to retain full control of Banque PSA Finance, dismissing calls by bondholders to sell a stake. Chief Financial Officer Jean-Baptiste de Chatillon said earlier this month the auto lender can boost funding through securitization in the event of a downgrade.

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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