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Rating Action:

Moody's downgrades Peugeot to Ba3; negative outlook

10 Oct 2012

Approximately EUR5.6 billion of debt affected

Frankfurt am Main, October 10, 2012 -- Moody's Investors Service has today downgraded to Ba3 from Ba2 the ratings of Peugeot S.A. ("PSA") and its rated subsidiary GIE PSA Trésorérie ("GIE"). This concludes the review initiated by Moody's on 26 July 2012. The outlook on the ratings is negative.

Downgrades:

..Issuer: GIE PSA Tresorerie

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba3 from Ba2

..Issuer: Peugeot S.A.

.... Probability of Default Rating, Downgraded to Ba3 from Ba2

.... Corporate Family Rating, Downgraded to Ba3 from Ba2

....Senior Unsecured Conv./Exch. Bond/Debenture, Downgraded to Ba3 from Ba2

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Ba3 from (P)Ba2

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ba3 from Ba2

Outlook Actions:

..Issuer: GIE PSA Tresorerie

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Peugeot S.A.

....Outlook, Changed To Negative From Rating Under Review

RATINGS RATIONALE

"Today's rating action reflects the significant challenges facing PSA to successfully restructure and turn around the operating performance of its automotive operations, including achieving the targeted break-even operating cash flow by 2014. Even if these measures are timely implemented, these circumstances will stress the company's metrics much beyond the existing rating category for the next couple of years," says Falk Frey, a Moody's Senior Vice President and lead analyst for PSA. "Given that we anticipate a further decline of 3% in light vehicle demand and increased pricing pressure in western Europe in 2013, PSA's announced initiatives may not be sufficient for the group to realise the financial results it is targeting within its restructuring plan which is reflected in the negative outlook," adds Mr. Frey.

PSA faces significant challenges in its efforts to turn around its loss-making automotive business and to reduce the currently high cash burn within its operations by implementing announced initiatives to reduce fixed costs and adjust capacities. These challenges are exacerbated by a worsening market environment in PSA's key European markets, with declining car demand and increasing price pressure, especially in the small car segments. In particular, as Moody's currently expects the downward trend in new car sales in western Europe to continue well into 2013, PSA might need to take further actions in order to stabilise its operations and achieve the targeted turnaround as announced. Based on Moody's calculations, should car demand in Europe remain at current low levels, the initiated reduction in capacity at Aulnay and Rennes of approximately 300,000 units might not be sufficient for PSA to achieve sustainably solid profitability well above break-even.

PSA has undertaken various initiatives aimed at improving its competitive positioning and operating performance (including new product launches and EUR1.0 billion cost reduction plan), as well as asset disposals and a capital increase of EUR1.1 billion to improve its balance sheet. The anticipated cash inflow from the asset disposals was intended to provide the resources and time that would allow PSA to implement the necessary operational and structural measures to turn around the core automotive business by 2014. However, a more adverse market environment and a further deterioration in pricing and car demand in Europe, PSA's key market, could result in a slower-than-anticipated reduction in the group's cash burn rate and thus erode over time its currently solid liquidity position, as discussed below. Following PSA's recent asset disposal programme, Moody's notes that the group has limited remaining assets available for sale.

For H2 2012, Moody's anticipates that PSA's results will be adversely affected by its restructuring provisions for its announced plant reorganisation, with most of the cash outflow to occur in 2013. Moody's expects the automotive division's reported recurring operating income to remain negative in 2013 before turning positive in 2014, which assumes timely implementation of PSA's recently announced restructuring plan.

Moody's notes that PSA's announced strategic alliance with General Motors (Ba1 positive), which is structured around sharing selected vehicle platforms, components and modules as well as a global purchasing joint venture, might result in medium to long-term cost savings for PSA. However, Moody's cautions that upfront expenses will negatively affect PSA's results in the short term. Moody's also notes that a number of past mergers and alliances in the automotive industry have not achieved the anticipated competitive advantages and improved performance.

The negative outlook on the ratings reflects the significant challenges PSA faces to turn around its loss-making automotive business and reduce the currently high cash burn within its operations, with the group needing to rapidly and successfully implement its announced initiatives to reduce fixed costs and adjust capacities. These challenges are exacerbated by a worsening market environment in PSA's key European markets, with declining car demand and rising price pressure especially in the small car segment. A further weakening in car demand in PSA's key geographies could lead to renewed pressure on the ratings and require the group to take additional measures to sustainably turn around the operating performance of its automotive operations.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's could further downgrade the ratings if PSA is unable to demonstrate that its announced measures are yielding the targeted results, including a clear path towards break-even operational free cash flow by end 2014. Therefore, Moody's would expect PSA to cut its current negative cash burn of EUR200 million per month to no more than EUR100 million per month in 2013 (excluding restructuring costs), resulting in the company exhibiting negative free cash flow of less than EUR1.2 billion for the full year 2013. In addition, a downgrade could result if PSA (1) is unable to limit the recurring operating losses before restructuring provisions in its industrial divisions division to EUR500 million or less in 2013; and (2) fails to stabilise its market shares in Europe given the renewal of key volume models. Moreover, key to PSA sustaining its liquidity profile, and its current rating, is the successful completion of its announced disposal of its logistics operations, Gefco.

Moody's considers that an upgrade over the short to medium term is unlikely. However, the ratings could come under upward pressure in there were to be a faster-than-anticipated and sustained recovery in the operating performance and cash generation of the PSA's automotive business. This recovery would be reflected by positive operating profits in the industrial business in 2013, with profitability improving to a positive EBIT margin by 2014 and beyond.

LIQUIDITY

Moody's notes that PSA currently maintains an adequate liquidity position, which provides the company with a period of time to execute a turnaround in its performance. At the end of June 2012, PSA's principal liquidity sources for its industrial business consisted of (1) cash on the balance sheet amounting to EUR7.5 billion; (2) availability under undrawn committed credit lines of EUR2.4 billion maturing July 2015 (excluding additional headroom of EUR600 million under Faurecia's facility); and (3) potential cash flow generation from operations over the next 12 months. These cash sources provide adequate coverage for PSA's major liquidity requirements that could arise during the next 12 months. These requirements consist of short-term debt maturities, capital expenditures, working capital funding and day-to-day operating needs.

STRUCTURAL CONSIDERATIONS

Peugeot's funding policy is based on borrowing at the holding company level (Peugeot S.A.), and on-lending to its operating subsidiaries via GIE PSA Trésorérie. Based on a cash-pooling agreement between PSA and GIE, all operating subsidiaries' payment obligations to GIE rank pari-passu with trade payables at the subsidiaries' level. In addition, Moody's understands that, before year end, PSA will put in place a guarantee by GIE to that will benefit PSA bondholders. Therefore, the ratings of PSA's outstanding notes and bonds are not notched below the group's CFR according to Moody's Loss Given Default Methodology.

RATING METHODOLOGY USED

The principal methodology used in rating PSA was the "Global Automobile Manufacture Industry" rating methodology, published in June 2011. Other methodologies used include "Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA", published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Peugeot S.A., headquartered in Paris, is Europe's second-largest maker of light vehicles with its two main brands Peugeot and Citroën. The group's other industrial operations include Faurecia, one of Europe's leading automotive suppliers in which PSA held a 57.43% interest at year-end 2010, and Gefco, France's second-largest transportation and logistics service provider. The group also provides financing to dealers and end-customers through its wholly owned finance subsidiary, Banque PSA Finance. In 2011, PSA generated revenues of EUR59.9 billion and operating income of EUR0.9 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Peugeot S.A. has received a Rating Assessment Service within the last two years preceding the Credit Rating Action.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Falk Frey
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Peugeot to Ba3; negative outlook
No Related Data.
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