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Published on October 20th, 2012 | by Daniel Sherman Fernandez


Troubled French Automaker Citroen Is Sinking

PARIS (Bloomberg) -Troubled French automaker PSA/Peugeot-Citroen is weighing a state-backed rescue for its finance arm, as the government warned that help would come with strings attached. Banque PSA Finance (BPF) offers financing for Peugeot and Citroen dealers and customer loans, contributing 979 million euros to group revenue in the first half. Punished by its costly domestic production and excess capacity, PSA is losing a European price war to larger and leaner rivals such as Volkswagen.
Recent downgrades to Peugeot’s credit rating threaten to relegate the financing arm to junk status, further widening the competitiveness gap by making its loans more expensive. Officials are working on measures to help BPF “obtain the necessary financing,” Finance Minister Pierre Moscovici said. “All of this will be finalized very soon.
As things stand, “BPF can refinance on the markets at around 4 percent, whereas Volkswagen is at 1-2 percent,” said analyst Florent Couvreur of CM-CIC. “This is fueling VW’s sales offensive because it can offer loans at half the price,” he added.
PSA is losing close to 350 euros on every vehicle sold, CEO Philippe Varin said last month. Its share of the shrinking European auto market dwindled to 11.8 percent in January through September, from 13.5 percent two years earlier.
Volkswagen’s market share jumped 3.5 percentage points to 24.8 percent over the same period.

According to Le Figaro, which first reported the BPF talks, a rescue package is likely to postpone repayments on 4 billion euros ($5.2 billion) of bank debt and introduce a new 1.5 billion-euro credit line and a 4 billion-euro state guarantee. Banks involved in the negotiations include BNP Paribas, Credit Agricole, Natixis and Societe Generale, the French daily said.
Slumping demand
Faced with slumping demand globally and tougher competition, the PSA plans to cut more than 10,000 domestic jobs, close an assembly plant near Paris and shrink another. But the restructuring has drawn fire from government officials including Arnaud Montebourg, the industry minister, who has repeatedly pressed PSA to reduce the scope of cuts. The company will have to give unspecified concessions if it wants government help, Montebourg warned. “There can be no state guarantee without commitments in return,” he said. A role in rescuing BPF may give the government new leverage to delay or restrict PSA’s restructuring, observers agree.

“It certainly makes it more difficult,” Barclays Capital analyst Kristina Church said. “Even if there were no official strings attached, there could be pressure.” BPF offers financing for Peugeot and Citroen dealers and customer loans, contributing 979 million euros to group revenue in the first half. Moody’s cut the automaker’s debt rating last week to Ba3, three notches below investment grade, raising the likelihood that the financing arm would also be relegated. While loans divisions are evaluated separately by the major agencies, their ratings are not allowed to stay more than two notches above the parent carmaker’s. The downgrades “may drag Banque PSA into sub-investment grade in spite of its intrinsic solidity,” PSA spokesman
Jonathan Goodman said in an e-mailed statement, citing the division’s 13.3 percent solvency ratio.
In July, Standard & Poor’s also cut Peugeot to BB, two rungs below investment grade, with a “negative” outlook signaling that a further reduction was likely.
“Management is examining various options aimed at the implementation of solutions permitting Banque PSA to provide both its end customers and distributor network with a level of financing sufficient to ensure the continued smooth functioning” of operations, Jean-Baptiste Mounier, a PSA spokesman, said in a statement. “Neither the principles, nor the details of such solutions have been finalized.”
The bank’s creditworthiness is “inherently linked” to that of PSA’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.
Peugeot’s stock has dropped 44 percent this year, valuing the automaker at 2.09 billion euros.

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