LONDON, Oct 18 (IFR) - Banque PSA is actively preparing for a possible slide into speculative-grade territory by planning to double its securitisation programme, although it also has sufficient liquidity in the meantime to shoulder a possible downgrade, analysts said.
Banque PSA, the financing arm of troubled French carmaker Peugeot, is on the brink of junk territory, with Moody’s yet to conclude its review for downgrade on the current Baa3 rating following parent Peugeot’s cut to Ba3 last week.
Historically, there has only been a two-notch differential between both entities, suggesting that PSA’s rating will now be lowered by one notch to Ba1 - its first decline into junk territory, should this be the case.
Such a move will probably have two main implications: the cost and availability of funding.
Banque PSA reckons that it could issue around EUR1bn-worth of bonds a year as a high-yield company, analysts said, but with EUR3.1bn out of EUR9.1bn debt maturing by the end of 2013, that leaves the company with a EUR2bn shortfall.
The company’s first step will be to rely on its unused committed EUR8.1bn credit facility. In addition, there are plans afoot for an additional EUR1.5bn credit line from the company’s lenders, which include BNP Paribas, Credit Agricole, Natixis and Societe Generale, Le Figaro reported.
The French government has also pledged its support to the business, and is looking at a possible guarantee for up to EUR4bn of funding, Le Figaro said, although analysts said this was not a full-blown rescue.
“This is not a bailout,” said Christophe Boulanger, a credit analyst at Barclays.
“Banque PSA is merely being proactive about using this facility as a kind of bridge until it has an ABS conduit in place. The company is being very pragmatic.”
Barclays said it would remain buyers of Banque PSA bonds whether it was rated investment-grade or high-yield.
“Once Moody’s completes its review it will enable benchmarked investors to bid on the bonds, as they currently trade at a significant discount to peers,” said Boulanger.
Banque PSA bonds screamed tighter across the board on the news. Some observers suggested that a rescue plan could even avert a downgrade and break the de-linkage between Peugeot and Banque PSA.
The biggest mover was Banque PSA’s 4.25% February 2016 bond, which printed in February 2011 at mid-swaps plus 143bp. Although that bond has widened sharply since then as conditions in the auto sector deteriorated, it was closed around 85bp tighter at 375bp on Wednesday, according to Tradeweb.
Despite the rally though, Banque PSA’s cost of funding is still significantly higher than its rivals. Its February 2016 bond is currently yielding around 4.4%, while RCI Banque’s March 2016 bond is at 2.9%, according to Tradeweb.
Securitisation is an obvious solution to the funding gap that would result from a downgrade to junk, analysts said.
The company said in July that it would double its securitisation programme to around 30% of funding, from 15% at the end of June 2012. The benefit of ABS is that it allows the de-linking of ratings from an originator, and it should attract good demand too as the market has been starved of supply in recent months.
Banque PSA has two options. It can either raise funds via the European Central Bank, or sell ABS to institutional investors. The latter is expected to be the issuer’s preferred choice, as it will avoid the minimum 16% haircut required by the ECB.
The main caveat is the time that such a transaction would take to put in place, but analysts are confident this is a credible option for Banque PSA.
Boulanger said the geographical spread of the company’s auto loans were supportive of an ABS deal.
Around two thirds of the company’s auto loans are exposed to Northern European countries - 35% in France, 14% in Germany, and 12% in the UK - which are perceived to be of higher quality.
Around 9% of loans are in Spain, 8% in Italy and the rest other countries.
Boulanger also pointed out that low delinquency levels were also encouraging. The net loss to receivables ratios for auto financial services unit “fincos” tend to remain low throughout the cycle, he said.
Those losses have remained below 1% for the five largest European fincos - Volkswagen, Daimler, BMW, Banque PSA and RCI Banque - since 2003, while in the U.S., the losses have never exceeded 2.5%.
Banque PSA is already a successful issuer in the ABS market, navigating market volatility to price a EUR720m 2.9-year auto loan ABS in November 2011. That was backed by German collateral, and attracted EUR750m worth of orders from 20 investors.
Banque PSA has been reported as saying that it will also use its bank facility to refinance EUR3.8bn of certificate deposits and commercial paper as at June 2012.
Another option at hand is the possible launch of a bank deposit scheme - already a successful tool for sector rivals Volkswagen, which has a EUR24bn deposit business, and RCI Banque, which started such a franchise at the beginning of the year and is targeting more than EUR750m by the end of 2012.
“Banque PSA could potentially raise around EUR0.5bn by end 2013,” said Boulanger.
“In a worst-case scenario the company could look to use third-party banks to fund new auto loans through a factoring contract or through a partnership with a capital tie-up.”