PARIS -- PSA/Peugeot-Citroen won European Union approval for the French government to guarantee 7 billion euros ($9.28 billion) in bonds for its banking unit. The guarantee will help keep the automaker afloat as it struggles to rein in losses.
In return for the EU approval, PSA agreed to curb its debt levels and faces restrictions on acquisitions.
EU Competition Commissioner Joaquin Almunia, said in a statement: "We have arrived at a formula which allows PSA to restructure in accordance with clear limits, reducing to a minimum the damaging effects for competitors who have not received support from public funding. This is a balanced result which offers the PSA group the chance to make a new start on a sound basis," he said.
PSA was forced to negotiate the state guarantee for its car loans arm, Banque PSA Finance, after a series of credit downgrades hit its borrowing costs.
The French government offered to guarantee the bonds for the automaker's bank to help the carmaker keep down borrowing costs, which is key to offering loans that are competitive with rivals such as Volkswagen Group.
PSA said in a statement that it welcomed the European Commission's approval of the French government's guarantee to secure debt issued by Banque PSA Finance in the period from January 1, 2013 to 31 December 31, 2016.
"This agreement has strengthened Banque PSA's financing and offers visibility and financing confirmed for more than three years," the company said in the statement.
Florent Couvreur, an analyst at CM-CIC Securitie, said the approval was good news for PSA. By helping out the automaker's bank, the French state "is effectively helping the whole company," he said. "But the EU Commission considered this didn't constitute a distortion of competition."
The Commission checks whether government aid is in line with EU competition rules. Under the terms of the approval, PSA will have to refrain from major acquisitions and take "additional corrective action" if net debt approaches an unspecified threshold, the Commission said.
The restrictions will also prevent PSA parts subsidiary Faurecia from making acquisitions worth more than 100 million euros without specific EU approval, the 57 percent-owned division said in a separate statement. The hurdle is "unlikely to have a material impact" on Faurecia's strategy prioritizing internal growth, it said
The Commission said the price paid by PSA for the three-year guarantee must be raised if its lending arm significantly increases its business among Peugeot and Citroen customers.
The restrictions add to conditions imposed by the French government in return for the aid, including limits on executive pay and job cuts and a government-appointed board director.
Besides the debt guarantee, Brussels approved a further 86 million in government funding for a PSA mild hybrid diesel program.
PSA is the carmaker worst hit by Europe's auto market slump. Its passenger car registrations in EU and EFTA countries fell 13 percent in the first half in a total market down 7 percent, according to industry association ACEA.
The company made a loss of 5 billion euros last year and is still burning through more than 100 million euros each month.
PSA and Banco Santander are discussing a finance venture that could replace the guarantee and bring the carmaker more freedom from state interference, Reuters reported last week.
The founding Peugeot family has also offered to give up control as part of a closer tie-up with 7 percent shareholder GM or another industrial partner, Reuters sources said.
Bloomberg and Reuters contributed to this report