UPDATE 2-Peugeot bailout gets EU green light


* Peugeot must keep debt in check - EU

* Carmaker due to publish H1 results on Wednesday

By Laurence Frost and Foo Yun Chee

PARIS/BRUSSELS, July 30 (Reuters) - PSA Peugeot Citroen won EU approval for a 7 billion euro ($9.28 billion) state-backed debt rescue, keeping the French automaker afloat as it struggles to rein in losses.

The European Commission said it had approved the financing aid, granted last year, on condition that Peugeot keeps debt in check and pays a higher rate as its financing business improves.

"This is a balanced result which offers the PSA group the chance to make a new start on a sound basis," EU Competition Commissioner Joaquin Almunia said in a statement.

Peugeot, the carmaker worst hit by Europe's five-year auto market slump, made a loss of 5 billion euros last year and is still burning through more than 100 million each month.

The Paris-based company was forced to negotiate the three-year state guarantee for its car loans arm, Banque PSA Finance, after a series of credit downgrades swelled borrowing costs.

Chief Executive Philippe Varin is due to announce first-half results on Wednesday and give an update on a restructuring plan in which the company is cutting 11,200 jobs over two years.

Peugeot shares rose sharply in after-hours trading and were up 5.7 percent in Frankfurt. The stock had earlier closed at 9 euros in Paris, up 4 percent on the day.

"This agreement has strengthened Banque PSA's financing and offers visibility and financing confirmed for more than three years," the company said in a statement welcoming the decision.

Under the terms of the EU approval, Peugeot will have to refrain from significant acquisitions and take "additional corrective action" if net debt approaches an unspecified threshold, the Commission said.

The restrictions will also prevent parts subsidiary Faurecia from making acquisitions worth more than 100 million euros without specific EU approval, the 57 percent-owned division said in a separate statement.

The hurdle is "unlikely to have a material impact" on Faurecia's strategy prioritising internal growth, it said.

Under the EU approval terms, the price paid by Peugeot for its guarantee must be raised if its lending arm significantly increases its business among Peugeot and Citroen customers.

The conditions add to those imposed by the French government in return for the aid, including limits on executive pay and job cuts and a government-appointed board director.

Peugeot and Banco Santander are discussing a finance venture that could replace the guarantee and bring the carmaker more freedom from state interference, people with knowledge of the matter said last week.

The founding Peugeot family has also offered to give up control as part of a closer tie-up with 7 percent shareholder General Motors or another industrial partner, sources have said.

Besides the debt guarantee, deemed equivalent to a 486 million euro subsidy, Brussels approved a further 86 million in government funding for a Peugeot mild diesel hybrid programme, according to the statement.



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