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Rating Action:

Moody's upgrades Peugeot to Ba1 with a stable outlook

26 Jul 2017

Frankfurt am Main, July 26, 2017 -- Moody's Investors Service, ("Moody's") has today upgraded the corporate family rating (CFR) for Peugeot S.A. (Peugeot, PSA) to Ba1 from Ba2 and the probability of default rating (PDR) to Ba1-PD from Ba2-PD. The outlook is stable.

"The upgrade of PSA reflects the continued improvements in the company's operating performance resulting in credit metrics that are expected to be well-positioned in the Ba1 rating category towards year-end," says Falk Frey, a Senior Vice President and lead analyst for PSA. "The rating also reflects an improved business profile resulting from the acquisition of GM's European operations (Opel) and Moody's grown confidence that the opportunities outweigh the challenges and integration risks that come along with the acquisition," Mr. Frey added.

A full list of affected entities and ratings can be found at the end of this press release.

RATINGS RATIONALE

In 2016 PSA, for the third year in a row, has been able to improve its profitability, generated positive free cash flows and improved its financial metrics. This positive trend also continued in the first half year 2017. PSA increased worldwide unit sales to 1.58 million (+2.3% YoY) resulting in an increase of automotive division's revenues of 3.3% and a Group revenue increase to €29 billion (+5% YoY). PSA managed to increase its reported recurring operating income margin to 7% of revenue from 6.6% in H1'16 for the group and to 7.3% for the automotive division (from 6.8% in H1'16) mainly driven by (1) a more favorable product mix; (2) efficiency gains in production and procurement as well as SG&A, following the ongoing restructuring of the group as well as (3) price increases and product enrichments while FX impact and higher raw material prices weighted negative on margins which is expected to continue in H2'17. The reported operational free cash flow was again positive with €1.6 billion in the first half year.

Following the approval of the acquisition of General Motors' (GM) European operations by the cartel authorities for around €1.1 billion cash and recent agreements with unions and politicians make us believe that releasing synergies through sharing additional platforms, combined purchases and, more importantly, joint R&D efforts will be realizable at an earlier stage than previously anticipated. In Moody's view the merger makes strategic sense, deepens an already existing relationship between the two companies and will strengthen the company's European market position in Europe where PSA has continuously lost market share since 2010. The combined businesses elevate the groups passenger car market share to 16.4% (EU + EFTA), regaining position as second largest OEM after Volkswagen Aktiengesellschaft (A3 negative).

While we caution that the acquisition increases further PSA's reliance on the European market to more than 2/3 of group sales from 61% in 2016, diversification within Europe increases as Opel is strong in markets where PSA is not, i.e. Germany and the UK.

The material investments necessary to employ PSA's electrification strategy could be spread over a larger vehicle base, while Opel's car models could leverage on PSA's recent efforts in CO2 emission reductions, having the lowest emission levels of European OEMs. Lastly, Opel also provides PSA with a production facility in the UK that could hedge the combined group's production position in case of a hard Brexit.

Based on the announced financing structure we do not anticipate a substantial change in PSA's credit metrics and from the consolidation of Opel. For 2017 on a pro-forma basis we would expect PSA's debt/EBITDA to fall below 2.5x despite a negative free cash flow resulting from the Opel acquisition and a dilution in the EBITA margin to around 4% from 4.7% in 2016 standalone.

Rating Outlook

The stable outlook reflects Moody's expectation that PSA's business model today has a better flexibility to contend with the long-term cyclicality within the global passenger vehicle markets than in the last cyclical downturn based on a significantly reduced break-even level of its European production network. The stable outlook also assumes that PSA will be able to weather the challenging landscape as a result of heavy investment requirements for (1) alternative propulsion technologies; (2) autonomous driving; (3) the shift of production capacities towards alternative fuel vehicles; (4) connectivity as well as (5) regulations relating to vehicle safety, emissions and fuel economy. Furthermore, the acquisition of Opel should not lead to a significant deterioration of PSA's credit metrics based on a relatively modest debt increase and low purchase price.

What could change the rating Down/Up

We do not anticipate any further upgrade for PSA over the next 12 to 18 months given the sizable challenges PSA is faced with a successful integration achieving a profitable turnaround of Opel. However the ratings could come under upward pressure should (1) PSA generate positive free cash flows despite anticipated restructuring cash outflows; (2) leverage (debt/EBITDA) fall constantly below 2.0x; (3) profitability be restored to an EBITA margin at or above 5% sustainably an the company's liquidity profile remain solid.

The Ba1 ratings could come under pressure should (1) PSA or the combined PSA-Opel group exhibit a sustained negative market share development in its key markets; (2) FCF generation become negative for a sustained period of time also impacted by sizable restructuring expenses relating to the acquisition of Opel or due to the inability to reduce Opel's cash consumption; (3) the company's EBITA margin fall below 3.0%; (4) its leverage (debt/EBITDA) exceed 3.0x on a sustainable basis; (5) the group's liquidity profile materially weaken, or (6) if there are any emission-related issues that would lead to significant fines, or other remediation measures, which is currently not part of our assumptions.

Liquidity

Peugeot's liquidity profile is solid supported by a cash balance of €13.2 billion as of 30 June 2017, internally generated cash flows and access to committed covenanted syndicated credit facilities of €2.0 billion maturing in 2020 and €1.0 billion maturing in 2018 (excluding €1.2 billion at Faurecia). These credit facilities were undrawn as of June 2017 and Peugeot was compliant with the financial covenants included in these credit agreements. These sources are deemed to be more than sufficient to cover the anticipated cash outflows for capital expenditures, maturing debt, working capital needs as well as the cash outflow for the acquisition of Opel.

LIST OF AFFECTED RATINGS

Upgrades:

..Issuer: Peugeot S.A.

....LT Corporate Family Rating, Upgraded to Ba1 from Ba2

....Probability of Default Rating, Upgraded to Ba1-PD from Ba2-PD

....Backed Senior Unsecured Medium-Term Note Program, Upgraded to (P)Ba1 from (P)Ba2

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba1 from Ba2

....Backed Senior Unsecured Regular Bond/Debenture, Upgraded to Ba1 from Ba2

..Issuer: GIE PSA Tresorerie

....Backed Senior Unsecured Regular Bond/Debenture, Upgraded to Ba1 from Ba2

Affirmations:

..Issuer: Peugeot S.A.

....Backed Other Short Term, Affirmed (P)NP

..Issuer: GIE PSA Tresorerie

....Commercial Paper, Affirmed NP

Outlook Actions:

..Issuer: Peugeot S.A.

....Outlook, Remains Stable

..Issuer: GIE PSA Tresorerie

....Outlook, Remains Stable

The principal methodology used in these ratings was Automobile Manufacturer Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Peugeot is Europe's (EU+EFTA) third-largest maker of passenger cars with its three brands Peugeot, Citroën and DS. In addition Peugeot holds a 46.6% interest in Faurecia SA (Ba2 stable, fully consolidated in PSA's results), one of Europe's leading automotive suppliers (turnover of €18.7 billion in 2016), and has a 25% shareholding in Gefco, France's second-largest transportation and logistics service provider. Peugeot also provides financing to dealers and end-customers through its finance arm Banque PSA Finance in joint venture with Santander Consumer Finance.

In 2016, Peugeot generated revenues of €54 billion and reported a recurring operating income of €3.2 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit 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
Client Service: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

No Related Data.
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