PSA debt risk soars as asset sales fail to ease cash concern
LONDON (Bloomberg) -- The cost of insuring PSA/Peugeot-Citroen soared more than any company in Europe on concern that asset sales won't be enough to bolster the carmaker's worsening finances.
Credit-default swaps on PSA jumped to a more than two- week high of 758 basis points at 12:50 p.m. in London on Friday from 647 on Sept. 14, the biggest weekly increase since May 2010. The contracts now imply a 48 percent chance of default within five years.
French President Francois Hollande said on Thursday Europe's second-largest carmaker is in "severe" difficulties after its rating was cut to three levels below investment grade by Fitch Ratings on Sept. 19.
To boost its balance sheet, Peugeot agreed this week to sell 75 percent of its Gefco truckmaking unit to Russian Railways for 900 million euros ($1.2 billion) including a special dividend.
The Gefco sale "is seen as a short-term positive for the beleaguered auto maker, but a medium-term negative due to the disposal of a profitable business," said Suki Mann, a strategist at Societe Generale in London.
Hollande's warning "spooked the market, but it's nothing new. We know the company is in dire straits."
PSA's automotive division has been burning through 200 million euros in cash a month for the last year, CEO Philippe Varin said in July as the company reported an 819 million-euro ($1.1 billion) first-half net loss.
Proceeds from the Gefco sale "are expected to be extinguished by cash burn," Vanessa Cochrane, an analyst at Mizuho in London, wrote in a note to investors.
Earlier this month, Hollande changed his stance on PSA's plans to close a factory and eliminate jobs to "inevitable" from "unacceptable." The shift marks an about- face for Hollande, who was elected in May on a pledge to prevent a "parade of firings."