French Carmaker Peugeot-Citroen Likely To Default: CDS Rates

The credit default swaps (CDS) market is pricing in a probable default by PSA Peugeot-Citroen (Paris: UG), as the struggling carmaker fights with the French government over shedding 14,000 jobs and closing a plant to cut costs.

The cost of insuring Peugeot's five-year debt with CDS has jumped 27.42 percent in the last month and 244.46 percent in the last year, according to Thomson Reuters and Markit Intraday Pricing. Likewise, the cost of insurance on the company's 10-year debt has risen 14.96 percent in the last month and 185.23 percent in the last year. There is now a 52 percent chance that Peugeot will default on its five-year debt and a 74 percent chance of default for the company's 10-year debt.

The rate of increase in CDS pricing for Peugeot five-year debt has skyrocketed in the past 24 hours, rising 9.8 percent.

The rising price of CDS insurance on Peugeot debt has come as the company battles newly elected French president Francois Hollande over the issue of shedding 14,000 jobs, according to Businessweek. Hollande, who led the Socialist Party to victory recently, said he will fight the planned job cuts, and on Saturday reiterated his election pledge by saying he would pressure Peugeot to adjust its restructuring plans. Analysts, though, doubt that the President has any real means of pressuring the carmaker.

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Peugeot desperately needs a fix, and fast. The company is currently losing €200 million ($245 million) a month and Moody's Investors Service has rated the company's debt Ba1, or junk, and warned of another possible downgrade unless the company moves quickly to fix overcapacity in production and its workforce. Moreover, Peugeot itself is predicting an 8 percent decrease in European automotive demand, an  increase from its previous prediction of 5 percent.

"Moody's believes that PSA faces tremendous operational stress with financial metrics, which ... are likely to deteriorate further in the current year and unsustainably high cash burn from its automotive operations," the report said Friday. Moody's says it believes Peugeot has adequate liquidity for available credit lines to cover expenses for the next year.

Peugeot's current plan of job cuts and factory closings would account for €1 billion in cost reductions.

"We hope the French government lets them cut production and shut some sites in France, or they won't have any earnings in the future," Kepler Capital Markets analyst Xavier Caroen said Monday, according to Bloomberg News.

First-quarter revenue for the company plunged 7 percent to €14.3 billion compared to the year before. The biggest losses came from the company's automotive operations where revenue dropped 14 percent. Revenue from new vehicle sales plunged 16.9 percent. Moreover, revenue and sales declined in all of Peugeot's major regions, including the massive Chinese market, with the one exception of Russia where the company has been aggressively launching new model lines.

To buoy the sinking company, Peugeot in the first quarter sold its Citer division for €448 million and its Paris headquarters building for €245 million. The company is in the process of divesting itself of up to €1.5 billion in assets.

However, in the short term the outlook is bleak for Peugeot as CDS prices climb and shares sink. PSA Peugeot-Citroen (Paris: UG) shares plunged 6.8 percent to €6.04 Monday, and have dropped almost 80 percent in the past year.