Credit cheers Peugeot?s early turnaround

There was some good news at last for Peugeot today as Europe's second-biggest carmaker by sales presented its first-half results.

The European recession has weighed heavily on the carmaker over the last five years with CDS spreads on the company trading at an all-time high, it peaked at 800bps in July 2012.

Even though spreads have tightened to around 600bps recently, markets were delighted today with news from chief financial officer Jean-Baptiste de Chatillon that the turnaround is progressing faster than expected.

What really excited markets, though, was the news that cash consumption dropped significantly from to €51m from €449m for the same period last year.

Further, as an extra bonus, the European Commission confirmed it would support a €7bn guarantee from the French state for the carmaker's struggling banking unit.

Peugeot's share price shot up more than 8% and CDS contracts, which are currently trading in points upfront, tighten by 2 points from 4.5 to 2.5 points in upfront terms. This is equivalent to spreads tightening by 29bps from 591bps to 562bps when converting using the Isda standard model with a 500bps coupon.

Besides spending cuts, the successes at Peugeot are in part thanks to purchasing savings on joint vehicle programmes with new alliance partner GM.

Meanwhile Fiat, which reported quarterly earnings yesterday, also owed its changing fortunes to the US. The Italian carmaker reported improved profits for the three months ending June 30th of €142m, against €32m for the same period last year.

Without Chrysler, in which Fiat holds a majority stake, maker of the hugely popular Cinquecento would have lost €247m, as European sales dropped 5%.

Continuing the raft of automotive earning numbers, Volkswagen also released expectation-beating quarterly earnings in Germany last night. However these were tarnished by a 12% drop in first-half operating profit.

Apart from tough conditions in Europe and slower growth in the US, increased competition and a product recall in China caused operating profits to drop to €5.78bn.

CDS spreads on Fiat and Volkswagen tightened by 5bps and 2bps, respectively, to 470bps and 73bps.

Credit markets are trading mostly flat as anticipation builds for possible QE future guidance from the Fed later today. The Markit iTraxx Europe index is currently trading 99.5bps and the Markit CDX.NA.IG index at 76bps.

Frans Scheepers, CFA

Vice President

Markit

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