The credit crisis hit French auto firm Peugeot particularly hard in 2009. At the end of the year, the company reported a loss of Eu1.2bn and was forced to take out an emergency Eu3bn loan from the French state as demand for new cars plummeted.
But nine months on, the outlook for the company is rosier, and Peugeot is already looking to reduce the amount of debt it placed on its balance sheet throughout the crisis. The company and its financing arm, Banque PSA, had issued a number of deals in the capital markets throughout 2009, including a Eu750m five year bond and a Eu1.5bn two year revolver with a group of 12 lending banks. Peugeot ended the year with net debt of Eu11.064bn.
Crisis is ending
"Although we still expect the European car market to be down on last year, we are passed the worst point of the crisis," says Olivier Casanova, Peugeots head of financing and treasury in Paris. "We are starting to deliver on our three year profit improvement plan, so we can reduce a portion of the significant financial liquidity we put in place last year."
Indeed, the companys fortunes are improving over 2010, and the group reported a net income of Eu680m for the first half of the year driven by record vehicle sales over the six months to June 30. But as the companys fortunes grow, so the coupon on its Eu3bn government loan, which is indexed to the firms profits, increases from an initial 6%. Peugeot has already announced that it will repay up to Eu1bn of the loan this year, earlier than the initial plan to start repaying the facility from April 2011.
This is not the only piece of prefunding that the borrower has turned to this year as it looks to tidy its balance sheet. In June, it bought back part of a Eurobond due to mature next year.
"We had an outstanding 2001 bond of Eu1.5bn that was maturing in September 2011," says Casanova. "We offered a reasonable premium of 40bp on the secondary price and were able to buyback Eu245m of bonds."
The following month, Peugeot signed a Eu2.4bn three year plus one plus one revolver, replacing an undrawn facility of the same amount set to mature in March next year.
The refinancing, which carries a margin of 170bp including a 40% non-utilisation fee, was led by BNP Paribas, Crédit Agricole, HSBC, Natixis, Royal Bank of Scotland and Société Générale as bookrunners. Citi, Commerzbank, Crédit Mutuel-CIC, Deutsche Bank, Santander and UniCredit were mandated lead arrangers on the deal, which proved popular in syndication.
"We received strong support from our core lending banks, and 13 of them increased their exposure from the original facility," says Casanova. "We launched the syndication, just before the sovereign crisis, with a view to renew the facility for Eu1.8bn, but the support was such that we were able to do the full Eu2.4bn. We had the support of 21 banks, including two new lenders coming in."
Investment-grade in all but name
Although the borrower has been a split-rated issuer since the start of 2009, investors have continued to regard it as investment grade. Moodys downgraded Peugeot from Baa2 to Baa3 in February last year, while Standard & Poors cut the firms rating to BB+ in August. Both ratings remain on negative watch, but the rating agencies positions may be more down to the firms lack of profitability last year than a weakness in the companys leverage position.
"We have a very strong balance sheet and a good cash position," says Casanova. "Investors know this, and they have understood that we want to go back to a full investment grade rating as soon as possible."
Indeed, investors flocked to a Eu500m issued by the borrower late in June this year. The transaction was priced with a coupon of 5.625%, tighter than the initial price indication of 5.75%-5.875%.
Although some borrowers worried about over-supply from the auto sector, as the deal came in the same week as Eurobonds from Renault and Volskwagen Bank, the transaction was heavily oversubscribed.
"We decided to go with a five year bond issue to achieve the lowest possible coupon, and in fact the deal has the lowest ever yield on a Eurobond for PSA," says Casanova. "We had strong support from over 220 institutions with a good breadth of geography. There was a book of Eu1.3bn for a Eu500m deal, and there hasnt been that many bond issues this year that were more than two times oversubscribed."
While the company has no plans to repeat its successful foray into the bond markets before the end of the year, its funding strategy will continue to focus on reducing its debt, and increase its chances of returning to investment grade status.