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05 Nov 2001
MOODY'S DOWNGRADES TO Baa2 CONTINENTAL'S SENIOR DEBT RATING AND CONFIRMS THE PRIME-2 RATING FOR SHORT TERM DEBT; EMTN PROGRAM NEWLY RATED; NEGATIVE OUTLOOK
First Time Rating For EURO 1 Billion EMTN Program
Frankfurt, November 05, 2001 -- Moody´s Investors Service today downgraded Continental AG's long-term
issuer rating to Baa2 from Baa1 and confirmed the group's Prime-2
rating for short-term debt. At the same time Moody's assigned
a long-term Baa2 and short-term Prime-2 rating to
Continental AG's new Euro 1 Billion EMTN program. The former issuer
ratings were withdrawn. The outlook for the new ratings is negative.
Moody's rating downgrade is based on the group's deteriorating operating
performance in a difficult market environment at a time when its financial
flexibility is reduced following debt-financed acquisitions (Temic)
and the cancellation of previously intended asset disposal. In
addition, declining auto production, strong competitive pressures,
high R&D requirements and increased pricing demands from powerful
OEM automotive customers could result in further margin erosion at least
over the near term. However, the company's strategic reorientation
with increased focus on cost efficiency, the initiated plant restructuring
program, and debt reduction are expected to support the group's
performance development during the current cyclical weakening.
Additionally, the company benefits from its long-term customer
relations and a more diversified product mix with a balanced exposure
to the cyclical OEM automotive industry as well as the typically more
stable tire replacement markets. Furthermore, the group's
innovative product portfolio might help offset volume declines through
increased penetration of product into new models (e.g. ESP
Continental's financial position has been weakened by the recent debt
financed acquisition of Temic (60% interest for EUR 398 Mio acquired
in 2001, remaining 40% for up to EUR 235 Mio expected to
be purchased in 2002), the cancellation of the disposal of ContiTech
as well as weakening operating results including losses at the group's
US and commercial tire operations. At September 2001, net
indebtedness including accounts receivable sales of approximately EUR
490 Mio amounted to EUR 3.4 billion in addition to leasing programs
valued by Moody's at roughly EUR 800-1,000 Mio in comparable
debt. Management's increased focus and commitment on cost cutting,
working capital management and efficiency and profitability improvements
is expected to stabilize negative performance trends, however,
continued restructuring need and the acquisition of the remaining 40%
Temic share is anticipated to delay any meaningful debt reduction into
2003 and possibly beyond. Continental benefits from long term,
committed financing arrangements, which provide support during the
current cyclical downturn. Nonetheless, despite only moderate
refinancing needs in 2001 and 2002, an additional layer of long
term financing is expected to be arranged to refinance the Temic acquisition
and provide additional headroom and flexibility.
Moody's anticipates that Continental's new CEO will decisively implement
new strategies to improve the company's market position in core growth
areas and to increase emphasis on profitability and cash flow generation
across the group including the newly added Temic operation. Large
acquisitions are not expected to be part of corporate development over
the short to medium term, however, strategic portfolio development
might include smaller, selective acquisitions, cooperations
or strategic alliances. Moody's views the shift in focus from an
aggressive growth towards a more conservative, debt-reduction
and cash flow oriented strategy favourable to the position of the debtholders.
Over the medium term Moody's expects the company to face a number of strategic
challenges in its tire as well as its automotive parts portfolio.
In addition, to optimising returns and value of its cash generative
and diverse ContiTech division after the failed disposal, Continental
will also have to improve its positioning and/or scale in the US tire
market and European commercial tires to ensure sustainable profitability
in these segments. In the passenger car segment, Continental
continues to be well positioned in Europe, especially in the German
market, however, weather-related volatility in its
strong Winter tire business and increased competition in the attractive
high-end segment with high-margin and strong loyalty,
might impact profitability.
In the company's automotive systems division, sustained growth in
electronic stability systems (ESP) is expected to help offset the impact
of the current decline in automotive production. Nonetheless,
to secure future growth and success, Continental will have to position
itself at the forefront of developing innovative systems in chassis management
and improving synergies between tire and electronics. Despite Continental's
unique positioning combining tire and brake/electronic competence in-house,
the recent strategic alliances between Bosch/Michelin and Siemens/Goodyear
has created two large and financially strong groups, which are expected
to increase competition and might result in increased need for R&D
expenses. The growing competition may eventually also lead to more
pricing power for the OEMs in this area, which in general have been
trying to offload R&D expenses to their suppliers. Below-cost
pricing at introduction and shortened product cycles due to the accelerating
pace of innovation and commoditization have depressed margins at R&D
driven automotive suppliers, as volume growth, economies of
scale and cost improvements have quickly been offset by price declines
reflecting the strong negotiating power of OEM customers.
The negative rating outlook reflects challenges relating to the realisation
of operating improvements and cost reductions, the potential need
for further restructuring measures as well as the potential for a more
pronounced and severe industry downturn than usual, which might
further delay a return to more conservative debt protection measures.
In addition, the company remains exposed to technological innovation
and R&D challenges and will need to successfully develop and integrate
its product range by leveraging its core competencies in tire, chassis
management and electronics while being faced with competition from financially
stronger or strategically better positioned companies.
The Continental Group, headquartered in Hannover, Germany,
is a leading first-tier supplier to the OEM automobile industry
of brake and chassis technology and the world's fourth largest tire manufacturer
with a strong position in its domestic market and in Europe. In
2000 the company generated total sales of approximately EUR 10.1
Senior Vice President
European Corporates Group
Moody's Deutschland GmbH
+49 69 707 30 700
Vice President - Senior Analyst
European Corporates Group
Moody's Deutschland GmbH
+49 69 707 30 700
No Related Data.
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