Peugeot at risk of debt default

Peugeot Citroen has a 51% chance of default after the price of insuring its debt surged to a record, according to Bloomberg data.

Credit-default swaps on the company’s debt jumped 50 basis points to an all-time high of 800 in London at one stage yesterday. The contracts have doubled since March and signal a 51% probability of default within five years.

Peugeot spokeswoman Caroline Brugier-Corbiere declined to comment.

Europe’s second-largest carmaker announced plans to close a plant in France and eliminate 14,000 jobs.

Peugeot is burning through €200m of cash each month and Moody’s Investors Service placed its Ba1 rating, already junk, on review last Friday for a possible downgrade.

Peugeot’s manufacturing and sales organisations had financial assets and undrawn credit facilities of €9.6bn as of Dec 31, the last date for which they provided a full data.

Peugeot’s cash reserves allow them to “survive for one to two years,” said Xavier Caroen, a Zurich-based Kepler Capital Markets analyst who has a “hold” rating on Peugeot.

“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.”

French president François Hollande, elected in May after pledging to block a “parade of firings,” said on Saturday he would lean on Peugeot to rework the plan intended to stem losses and trim production capacity. The government will report the findings of a review later this month, as well as measures to prop up the French auto sector.

Peugeot said last week its automotive division will post a first-half operating loss of €700m compared with a profit of €405m a year earlier. Peugeot is selling assets, including a stake in its profitable Gefco trucking unit to raise cash. The Paris-based manufacturer earlier this year also issued €1bn in new stock to existing shareholders.

A basis point on a credit-default swap protecting €10m of debt from default for five years is equivalent to €1,000 annually. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The company’s shares dropped as much as 31c, or 4.7%, to €6.18 and traded 4.2% lower in Paris yesterday. The stock has declined 76% in the last year, valuing the French company at €2.21bn.

Earlier this year, Peugeot formed a strategic alliance with General Motors in which the US carmaker took a 7% stake to become the second-largest shareholder after the founding family. They plan to work on joint development and purchasing to reduce costs. GM also plans to close a factory in Germany.