MOODY'S ASSIGNS Baa1 RATING TO SENIOR UNSECURED NOTES OF J.M. VOITH AG
Moody's Investors Service today assigned a Baa1 rating to the proposed Euro 250 million (approx.) senior unsecured notes with a maturity of up to 10 years of J.M. Voith AG (Voith). The rating reflects (i) Voith's strong positions in its key markets, especially in paper machine clothing and power transmission, (ii) management's strategy to mitigate the cyclicality of its core activities by building a contract-based service business while preserving a liquid and moderately leveraged balance sheet, and (iii) the company's stable shareholder base. However, more negatively, the Baa1 rating reflects the need to improve the cash flow of the core paper machine business through the cycles, the potential for acquisitions or joint ventures as several of the company's industry segments consolidate, and the limited access to equity to finance such strategic moves. This is the first time that Moody's has rated the debt of Voith.
Voith is a diversified engineering and manufacturing group of companies with leading market positions in paper machinery, paper machine clothing, power transmission, and hydro fluid machinery. The operating results of the paper machinery division, making up about half of group sales, are very volatile due to cyclical nature of the business; but this volatility is partially compensated for by the paper clothing and power transmission divisions. Management has introduced cost saving measures to lower the break-even point and it may benefit from the demise of Beloit, a significant competitor. This effectively leaves only Voith and Metso of Finland to share the bulk of the market.
Spurred by increasing concentration in the paper machine industry, and in order to reduce dependency on the paper machinery business, Voith recently acquired the well-established roll-cover/paper clothing activities of the UK specialty materials producer Scapa plc for about Euro 500 million. Upon integration into Voith's existing paper clothing activities, Moody's expects the combined operation to achieve a 14% share of the Euro 2.6 billion market and to contribute a higher volume of stable and reliable cash flows to the group. In addition, the regular service that comes with the fitting of the product is key to maintaining a stable customer base.
The Scapa acquisition for about Euro 500 million was financed with debt, which has turned Voith -a perennial net-depositor- into a moderately leveraged company. Voith's current capital structure and the expectation of debt reduction balanced with the business risk of the new group are reflected in the Baa1 rating.
Moody's expects Voith to grow through a mix of organic and external growth. Further acquisitions -if at a much lower level than seen recently- are likely to be part of corporate development over the next few years. This is largely due to the current concentration in the paper machinery industry and Voith's efforts to strengthen the importance of the less cyclical businesses within the group. Management is expected to use prudence as to the amount of debt raised in this respect, and to focus on reducing the existing debt. Family ownership allows for a stable shareholder base. Limited access to new equity is not considered a material disadvantage if external growth remains moderate going forward. Financial policies and goals as presented to Moody's are deemed conservative.
Moody's understands that as a general rule, all financing is being raised and managed at the Voith parent company level via a cash-pool and centralized funding. In limited cases only, subsidiaries may borrow short-term funds directly for order-related or working capital purposes. Hence structural subordination is not a critical issue.
The Voith Group, headquartered in Heidenheim/Brenz, Germany, is a diversified engineering and manufacturing company with leading market positions in paper machinery technology, power transmission (couplings and retarders) and power generation turbines. The company had total sales of DM 3.7 billion ($2.1billion) and EBIT of about DM 240 million ($135 million) in the financial year ending September 30, 1998 (German GAAP). The acquisition of the Scapa operations will generate approx. DM 800 million in additional sales.
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