On July 30, 2014 Standard & Poor’s Ratings Services revised its outlook on French automotive manufacturer Peugeot S.A. and related entity GIE PSA Tresorerie to positive from stable. At the same time, we affirmed our ‘B+/B’ long- and short-term corporate credit ratings on the companies.
We also affirmed our ‘B+’ issue rating on the senior unsecured notes issued by Peugeot and GIE PSA Tresorerie. The recovery rating is ‘4’, indicating our expectation of average (30%-50%) recovery in the event of a payment default.
The outlook revision reflects our view that Peugeot should post meaningfully positive free operating cash flow (FOCF) by year-end 2014 and therefore achieve stronger-than-expected financial metrics. The outlook also factors, in our view, that strategic initiatives, cost savings, and restructuring measures may lead the automotive division to remain close to break-even at the operating income level.
We see a possibility that Peugeot’s adjusted funds from operations (FFO)-to-debt ratio may exceed 20% in 2014, thanks to better operating trends coming from the new strategic plan “Back in the Race,” compared with our previous expectation of 15%. The company’s sound performances over the first half of 2014 have led us to revise our previous expectation of sustained cash burning. We now assume that the company will generate positive adjusted FOCF in 2014 owing to a reduction in working capital and marginally positive EBIT generation before exceptionals at the automotive division. This, combined with €2.9 billion of proceeds from the recent capital increase, should drive a substantial reduction in adjusted debt to our estimate of about €6.5 billion in 2014, compared with €9 billion on Dec. 31, 2013.
Yet, cash flow generation still constrains the rating, in our view. We believe that FOCF may fall in 2015, as reducing working capital further is challenging and new vehicle launches seem less promising, even though the average age of the product range is relatively low. We calculate an adjusted FOCF-to-debt ratio of less than 5% on average over the next three years, which is low for the current rating level.
While we still view Peugeot’s business risk profile as “weak,” the company is starting to reap the benefit of restructuring measures. The ratings are still constrained by its low profitability, its reliance on European markets, and the high volatility of the group’s earnings. Still, Peugeot is reducing its cost base and increasing the utilization rate of its European facilities, which reached 84% in the first half of 2014, compared with 72% in 2013. The company is also performing well in China. There are still several pockets of losses, however–notably in Russia and Latin America. Additionally, capital expenditures and research and development costs appear low relative to peers, although Peugeot benefits from cooperation agreements with several auto makers.
Under our base case, we assume:
- Worldwide growth in real GDP of 3.4% in 2014 and 3.9% in 2015, with mild recovery in Western Europe (1.4% in 2014 and 1.8% in 2015).
- A growth in global car sales of 1.1% in 2014 and 4.2% in 2015, with an increase of 4.2% and 4.4%, 2014 and 2015, respectively, in Western Europe.
- Automotive division close to break-even in 2014 and 2015.
- €350 million of restructuring expenses in 2014 and €200 million in 2015.
- Stable capital expenditures-to-revenue ratio.
- No dividend payment in the next two years.
Based on these assumptions, we arrive at the following credit measures:
- An adjusted EBITDA margin of about 6% in the next two years.
- An adjusted FFO-to-debt ratio of more than 20% in the next 12 months.
- An average adjusted FOCF-to-debt ratio of less than 5%.
Liquidity
The short-term rating is ‘B’. We view Peugeot’s liquidity as “adequate” under our criteria, based on our projection that the ratio of potential sources to uses of liquidity will exceed 1.2x in each of the coming two years.
On June 30, 2014, we calculated €12.8 billion of liquidity sources over the next 12 months, comprising:
- €7.8 billion of cash and cash equivalents in the industrial division (including auto parts subsidiary Faurecia), after applying a 25% cash haircut;
- €3 billion of undrawn credit lines, of which €1 billion matures in 2017 and the remaining in 2019; and
- €2 billion of reported FFO forecast over the next 12 months.
At the same date, we estimated Peugeot’s liquidity sources to be approximately
- €6.9 billion, including:
- €4.1 billion of short-term debt maturities in the industrial division;
- €0.4 billion of working capital outflow; and
- €2.5 billion of capital expenditures.
The positive outlook on Peugeot reflects our view that higher-than-expected FOCF generation may materially improve the company’s credit ratios over the next 12 months. It also factors in our assumption that restructuring measures will enable the automotive division to remain close to break-even at operating income level. Under our base-case scenario, we assume for the next 12 months a slight increase in revenues excluding currency effect and an adjusted EBITDA margin of about 6%.
Upside scenario
We may upgrade Peugeot if we observed that the company is able to sustain an adjusted FFO-to-debt ratio of more than 20% and to generate recurring positive FOCF. If so, we would reassess our view of the financial risk profile to “significant” from “aggressive.” Such a scenario could unfold if the implementation of new strategies enabled the automotive division to achieve positive operating profit and if the company preserved the reduction in working capital achieved at mid-year 2014.
Downside scenario
We could revise the outlook to stable if Peugeot was unable to maintain strengthened credit ratios because of declining earnings or rising working capital. We may also change the outlook to stable if the automotive division failed to reduce its operating losses, possibly due to a further weakening of the European car market or falling market shares.
Ratings Score Snapshot
Corporate Credit Rating: B+/Positive/B
Business risk: Weak
- Country risk: Intermediate
- Industry risk: Moderately High
- Competitive position: Weak
Financial risk: Aggressive
- Cash flow/Leverage: Aggressive
Anchor: b+
Modifiers
- Diversification/portfolio effect: Neutral (no impact)
- Capital structure: Neutral (no impact)
- Liquidity: Adequate (no impact)
- Financial policy: Neutral (no impact)
- Management and governance: Fair (no impact)
- Comparable ratings analysis: Neutral (no impact)
Recovery Analysis
Key analytical factors
- The issue rating on the senior unsecured debt is ‘B+’, with the recovery rating of ‘4’, indicating our expectation of an average (30%-50%) recovery for debt holders, albeit at the lower end of the range. The recovery rating is underpinned by our opinion of Peugeot’s extensive product range and well-recognized brands and undermined by our belief that there would be a lower value remaining at the point of default, due to a shrinking asset value, substantial prior-ranking liabilities, and the unsecured nature of the notes.
- In our hypothetical default scenario, we assume a payment default in 2018, owing to overall economic deterioration and declining car sales leading to a sharp deterioration in operating performance and negative free cash flow generation in the auto business.
- We value Peugeot as a going concern, as we believe that stressed asset values provide a good indicator of the enterprise value at default. In line with our captive finance methodology, we have not included Peugeot’s wholly owned finance subsidiary Banque PSA Finance in our analysis.
- We deduct about €5.5 billion in priority liabilities from the estimated stressed enterprise value. These liabilities largely include secured loans from the European Investment Bank, loans taken out by local
subsidiaries as well as Faurecia’s debt, which we consider to be structurally senior.
Simulated default assumptions
- Year of default: 2018
- Jurisdiction: France
Simplified waterfall
- Net enterprise value (including 5% enforcement costs): €8.8 billion
- Priority claims: €5.5 billion
- Unsecured debt claims: €8.9 billion*
- –Recovery expectation 30%-50%
*All debt amounts include six months of prepetition interest.
Ratings List
Ratings Affirmed; Outlook Action
To From
Peugeot S.A.
GIE PSA Tresorerie
Corporate Credit Rating B+/Positive/B B+/Stable/B
Ratings Affirmed
Peugeot S.A.
Senior Unsecured B+
Recovery Rating 4
GIE PSA Tresorerie
Senior Unsecured B+
Recovery Rating 4
Commercial Paper B
