2nd UPDATE: Peugeot-Citroen To Prepay EUR1 Billion Of State Loan

French car maker PSA Peugeot Citroen SA (UG.FR) plans to repay EUR1 billion this year of a EUR3 billion loan that the company received in 2009 from the French government, Chief Executive Philippe Varin said Wednesday.

Both Peugeot Citroen and French rival Renault SA (RNO.FR) received a EUR3 billion low-interest government loan last year to help them through the economic downturn.

Renault chief executive Carlos Ghosn said last week his company aims to repay its loan ahead of maturity, as it can now obtain more favorable terms in the market. Both loans carried a 6% interest rate through maturity in 2014, and came with strings such as forbidding the companies to shut down any French plants for the duration of the loan.

Industry Minister Christian Estrosi, addressing the conference, pointed out that the loan contract with two car makers allows for early repayment starting in April 2011.

The loan terms also oblige the two car makers to work on developing low-emission vehicles and improving their relations with suppliers, he said. He made no reference to the obligation to maintain jobs, however.

Laurent Burelle, chief executive of Plastic Omnium, a French parts supplier, pointed out that the main problem of the French automobile industry is over capacity. "There are 50,000 employees too many, there is demand for two million vehicles versus production capacity of four million," he said.

"We haven't received any formal request from (the two car makers) Estrosi said. "We will examine this in a calm manner", notably on how the money can be reinvested in other sectors, including the automobile industry, he said.

Varin indicated that the French government intends to use the freed-up funds to help France's ailing automotive suppliers. Renault Chief Executive Carlos Ghosn said that with the improvement of the financial market compared to one year ago when automotive companies were struggling to stem their cash outflow, "we have no reason today to hold on to the money."

Ghosn also suggested that the portion of the funds to be reimbursed "could be reinjected into the circuit" of the automobile sector, and said the repayment will be organized in consultation with Peugeot-Citroen and the government.

Speaking at a lunch with auto industry executives, Varin also said the company expects the French car market to decline 9% in 2010, but reaffirmed that first-half earnings would be "largely positive." Last month, when it gave out its first-quarter revenue data, Peugeot-Citroen said it expects to report "significant recurring operating income" for the first half of 2010.

Varin said Peugeot-Citroen is pursuing its strategy of expansion in markets outside Europe and confirmed that the company is in talks with a Chinese partner about setting up a second joint-venture there.

Chinese automotive company Changan Automobile Group confirmed last month that it is in discussions with the French company, which already has a Chinese joint venture with Dongfeng Motor.

Varin said his company also envisages the construction of a third Chinese assembly plant to feed the Chinese market that he predicted could expand by 20% this year. Last year Peugeot-Citroen produced 270,000 cars in China for a market share of just over 3%. This year's production is likely to top 350,000 vehicles, he said.

Varin also said Peugeot-Citroen doesn't exclude the possibility that it might move into the low-cost part of the automobile market from which it has been absent up to now. But he stressed that, if this happens, the cars won't carry the badges of the company's Citroen and Peugeot brands.

-By David Pearson, Dow Jones Newswires; +33 1 4017 1740; david.pearson@dowjones.com

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