Peugeot, Its Record High Default Probability, And A Brief Primer On Corporate Viability Under Socialism

Tyler Durden's picture

With central bankers dominating the airwaves, and the only thing that matters is who prints where and how much, most can be forgiven to have missed one of the more important micro developments in the past few weeks: namely the case study of emblematic French automaker Peugeot, which just happens to be Europe's second largest, and its Credit Default Swaps, which have doubled in the past  4 months, to a record high spread of 813 bps, which means the probability of default for the company has nearly doubled from 29% to 52% in a few short months. Yet what is it about Peugeot that is interesting - well the fact that the biggest spike in its default risk has taken place in the last few days, which have seen a nearly 100 basis point spike. The catalyst: "French President Francois Hollande, elected in May after pledging to block a “parade of firings,” said July 14 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." The problem is that this type of state intervention into corporate viability and profitability is precisely what precipitates wholesale bankruptcy. And this is precisely what the bond market has reacted to. Because while Hollande is doing all he can to pander to populism, and to recreate America's epic failure involving GM, the reality is that by enforcing what he thinks is "right" and "fair" dooms not only Peugeot and its 200,000 employees, but millions of upstream and downstream workers.

Bloomberg has a brief background on the story:

Europe’s second-largest carmaker announced plans to close a French factory and eliminate a total of 14,000 jobs. Peugeot is burning through 200 million euros ($244 million) of cash each month and Moody’s Investors Service placed its Ba1 rating, already junk, on review July 13 for a possible downgrade. Peugeot’s manufacturing and sales organizations had financial assets and undrawn credit facilities of 9.6 billion euros as of December 31, the last date for which they provided full data.


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

In other words, all else equal, the company will, in its current format, go out of business in "one to two years" as it simply can not grow into its balance sheet, and because its expenses far outstrip its revenues. So what does the company do? The logical - it fires, or specifically it announces its intentions to fire, 14,000, or about 7% of its labor force: an act which in itself very well may be insufficient, but at least it will extend the viability of the firm courtesy of a modestly reduced cash burn.

Not so fast, says president Hollande.

Instead, according to the socialist, the company is wrong, and he is right, in that its top line can support its overhead. How? Nobody knows, but according to the French president, 1-2 years of cash viability is not a concern (and by that time who knows: maybe someone else will be president anyway). So instead what will happen is Peugeot will not fire anyone, and the market, convinced that the company is a goner will send its cost of debt into the stratosphere making refinancing, or loan extension, impossible. And who can blame the market: without a gun to its head, who wants to literally burn money?

So as the company gets locked up into a terminal toxic spiral of ever increasing debt costs, and ever declining cash flows, what happens? Well, in two years the company filed for bankruptcy, and instead of 14,000 people being fired today, in the process extending the viability of the company for at least a few years, the company will without any doubt, file for bankruptcy by 2014 at the latest, costing the jobs of not only the firm's employees as it gets acquired by some Chinese auto consortium merely for its trademarks (and certainly not for its unions), at pennies on the dollar, but also millions of jobs of upstream vendors as well and downstream distributors, retailers, mechanics, and all other related jobs.

So here is today's lesson in corporate viability under socialism:

  1. Lose 14,000 jobs today, while preserving the enterprise and its 186,000 remaining jobs, but losing some popularity in the process
  2. Or be hailed a hero of the people and for the people, preserving 14,000 jobs for 2 years, and watch as your entire auto industry disintegrates in two years.

This is a question we would pose not only in France, but every other place that is experiencing creeping socialism. Which incidentally is every country in the "developed" world.

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mikla's picture

Let's just make this simple and stop pretending the company is run by private executives.

The new model is illustrated by Government Motors in the US.

Are you really going to make them do all the paperwork to have the Gubbermint seize the company outright?

The issue is, "unbounded forward-liabilities".  For example, that was "Unions and Pensions" at GM.  When Management (using the term "loosely") can no longer bound their forward-liabilities, then risk cannot be tied to investment, and the whole company is clueless.  Unmanageable.  Will fail.

Government, in this case, is merely the biggest vulture to pick-at-the-carcass, to select who will be the biggest "losers-among-the-losers".

NotApplicable's picture

"We had to destroy the auto industry, in order to save it."

ACP's picture

"We had to destroy the Constitution, Democracy, Individual Rights and order to save our own asses."

Sandmann's picture

and the Suckers let us do it as long as they had a salt lick in the corner of the field.

Tippoo Sultan's picture

Tyler, the solution is so obvious -- how could you have missed it ?

When its cash resources have been exhausted, Peugeot will be nationalized, much the same as the above-referenced GM nationalized in de facto fashion in the United States. There is no such thing as a corporate/private loss anymore; it is all public now.

OttoMBMP's picture

The new EAISF (European automobile industry stability fund), to be funded primarily by European luxury-car makers, will happily bail out Peugeot.

Uber Vandal's picture

Not so funny thing, I was just thinking today about the last time I heard the phrases "Job Security" and "It's a Free Country".

Silver Bug's picture

Sadly governments around the world seem to be going more and more towards socialism.

firstdivision's picture

That means buy as much equity in Peugot as one can.  This shit is going to the moon!

FYI: WTI about to break north of $90.

Debeachesand Jerseyshores's picture

And returns back to $70's when the crude oil markets realized the pipelines have been completed to deliver crude oil to tankers avoiding the Straits of Homus.

BigJim's picture

Those pipelines - are they buried nice & deep?

Very, very difficult to defend long pipelines from missiles, suicide bombers, etc

Never One Roach's picture
Not again! Ford, Volvo announce new recalls By Paul A. Eisenstein, The Detroit Bureau

A total of 8,266 2013-model Ford Escapes impacted by the new recall were sold in the U.S., the rest going to Canada and Mexico.  It’s unclear how the news will impact the otherwise well-reviewed crossover.

As for Volvo, its recall impacts just 1,469 S80 models from the 2011 to 2013 model-years.  The maker says faulty software can prevent the automatic transmissions in those vehicles from downshifting from fifth to fourth gears.  In turn, that could lead the vehicle to stall and possibly result in an accident, according to the NHTSA.

GeezerGeek's picture

There they go again, blaming the problem on the software guys. It's really the engineers' failure to think things through. Steering and brakes should continue to function normally whether the engine is running or not, just like they did in the 1940s. And who needs an automatic transmission with five speeds? If two forward gears was enough for the old PowerGlide, it should be enough for any Volvo. This modern world is getting too complicated for its own good. Let's turn technology back 100 years to 1912.

Bonus: no Federal Reserve in 1912, either.

CTG_Sweden's picture




"And who needs an automatic transmission with five speeds? If two forward gears was enough for the old PowerGlide, it should be enough for any Volvo."

What do you think about the 4-speed Hydramatic which was introduced during the model year 1940 as optional equipment for Oldsmobile (Cadillac´s were offered with the Hydramatic for ´41)? I guess the Hydramatic is too modern for you, :D .

As regards Volvo I think they should have tried to buy the rights to the 4-speed Hydramatic which was discontinued in 1964 or -65. It would have been perfect for the small B36 V-8 which they never used in the 164 (instead they used it for a commercial truck!).

doc_in_the_house's picture

spx @ 1364 = shorted!!

just added my FIRST LAYER of shorts.....been PATIENTLY waiting since i covered my spx 1370-1360 shorts last week @ 1326-1328....i knew that there would be more pumps before going to 1100ish....

Next layer of shorts @ 1375+...thank you MUPPETS !!! LOL !!!!!

francis_sawyer's picture

nobody fucking cares... (cept for the algos)

fuu's picture

He seems to think that the muppets are still in the market.

Dr. Engali's picture

Every day is another step closer to the final implosion.Watching these clowns would be funny if one likes to watch a Greek,in this case French, tragedy.

BigJim's picture

Watching these clowns would be even funnier if their propaganda and actions weren't destroying our societies.

timbo_em's picture

Francois Hollande the new Über-CEO of France. Since car sales in France are pretty solid, what is he going to do? Give money to Spain that they then buy more German cars?

bagehot99's picture

Nationalized Automakers have got just an AWESOME track record. Ask Triumph, Austin, Morris and all the other British automaking titans how British Leyland worked out for them. Hint: Hindenburg, Pearl Harbor, etc.

The idea that the prescription for fixing what Socialism broke is more Socialism makes me smile, followed by the desire to throw up. People are fucking stupid.

Sandmann's picture

Volkswagen didn't do badly.......

americanspirit's picture

Has anybody mentioned that Peugeot makes really clunky cars? I know there are fanatics who love them but like a lot of French technology they are an engineering nightmare. If you have never done it and have a chance to do so just pop the hood and imagine trying to find whatever might need fixing much less getting to it. Wires and tubing everywhere - designed to provide maximum income for mechanics. I'm not at all sure that the world would miss the Peugeot any more than we miss the Yugo - for different reasons of course. Their trucks aren't bad, but not world class either.

The Final Countdown's picture

That's just stereotype BS, there's little to no difference between the build quality and reliability of similarly priced cars these days. It's not 1960 anymore.

css1971's picture

TÜV reports. An unbiased look at reliability. The faults may not be big ones, i don't know but they've been reported. Price almost certainly comes into it.

Sandmann's picture

Peugeot has no trade in value. Buy one and you are stuck with Peugeot

Nobody For President's picture

Yeah - French engineering. They even managed to make some ugly airplanes, which is hard to do because form (usually) follows function. (Couzinet 70, Bleriot 125, Dewoitine D 338 fer example.)

They make up for it with their women, however. 

CTG_Sweden's picture



"Has anybody mentioned that Peugeot makes really clunky cars?"

Peugeot actually has a good reputation for rugged and durable mechanics, especially the diesel models. The Peugeot 404 and 504 built a good reputation for Peugeot in that respect. But they were more rust-prone than - for instance - the Volvo 140. Nor were the mechanics as durable as for Volvo, but quite OK compared to many other brands.

Today, Peugeot/Citroen and Renault make elegant cars that in many cases look more expensive than they really are. But the quality reputation and the quality feel is not as good as for Volkswagen, for instance. Therefore, French automakers can not charge the same prices as Volkswagen. They have to compete with brands like Kia which is hard if you have to pay French wages.

Furthermore, it seems as if Americans are more sensitive about the kind of quality problems which are typical to French cars. Peugeots are not bad in all respects as regards quality. Mechanical durability can actually be quite OK, even though the old rear-drive models were more competitive in this respect. But I guess that´s not enough for American consumers. They prefer Japanese style quality.


The Final Countdown's picture

No problem, we'll just let Hollande bail out Peugeot, so we can all bail out France later. We'll just fire some more people over here, we're kind of used to subsidize uncompetitive French industries so they don't have to scale down anyway.

Richard Head's picture

Peugeot probably hasn't even begun channel stuffing.  It's got legs.

Saro's picture

"We hope the French government lets them cut production"

Love the use of the word "let", as in "We may or may not let you go out of business".

Directive 10-289 for everyone! No one can quit their job!  No one can go out of business! Everybody just freeze!

jez's picture

It's so long ago now that I can't be sure it really happened, but I seem to remember that in the 1970s, the lunatic President Idi Amin of Uganda solved his country's unemployment problem by making it illegal to be unemployed.


But France is not Uganda, I do realize.

Joe Davola's picture

Well they could follow President Choom Wagon's lead and eff-over the greedy bondholders, then still run it into the ground.

oldmanagain's picture

The author's take on the GM successful bail out, is counter factual.  The far right are like turtles on their back trying to get back on their legs but don't know which way is up.

Central Bankster's picture

Let me clue you in here. This left/right bullshit, yah its you idiots on one team, free market libertarians on the other. You fucking socialists/fascists are tearing society apart.

GeezerGeek's picture

I'm certain that sales and profits would improve if Peugeot could simply acquire rights from GM to produce the Volt.

Sandmann's picture

It would improve if Peugeots lasted longer than the car loan

hugovanderbubble's picture


Ur banking system is going to crash...

hugovanderbubble's picture

General Motors II


Sandmann's picture

Peugeot tried to offload its car receivables onto the mean it didn't succeed ?

Turin Turambar's picture

What a bunch of dolts running Peugeot.  All management needs to do is ramp up production and channel stuff it onto its dealers.  Happy times are here again!  Record sales!  LOL  Worked for GM  ;-)

Bastiat009's picture

Peugeot is badly managed and didn't refuse the government's bailout money a few years back. That said, communist unions and uneducated employees cannot help.

loveyajimbo's picture

Minor issue... the cars SUCK

Testudo321's picture


" So here is today's lesson in corporate viability under socialism:

  1. Lose 14,000 jobs today, while preserving the enterprise and its 186,000 remaining jobs, but losing some popularity in the process
  2. Or be hailed a hero of the people and for the people, preserving 14,000 jobs for 2 years, and watch as your entire auto industry disintegrates in two years. "

Tyler you forgot:

3.  Pump enough public money into the enterprise to survive not only 2 years but your entire elected mandate; become even greater hero; collect kickbacks in secret and when money runs out under next president and company goes belly up - it is not your problem any more...