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Rating Action:

Moody's affirms Henkel's A2 rating; outlook remains stable

09 Sep 2020

Frankfurt am Main, September 09, 2020 -- Moody's Investors Service, ("Moody's") has today affirmed the A2/Prime-1 senior unsecured long-term and short-term ratings of Henkel AG & Co. KGaA (together "Henkel" or "the group"), and the Prime-1 senior unsecured short-term rating of its guaranteed subsidiary Henkel of America Inc. The outlook on the ratings is stable.

"Today's rating action reflects the company's strong track record of maintaining solid credit metrics and a sustainably positive free cash flow generation, which we expect to continue despite a recessionary macroeconomic environment in 2020 triggered by the spread of the global pandemic", says Vitali Morgovski, a Moody's Assistant Vice President -- Analyst and lead analyst for Henkel.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Henkel's rating is supported by the group's strong business profile with a diversified portfolio in terms of brands, products and geographies. Its product portfolio balances the more cyclical Adhesives Technologies segment with the non-cyclical Laundry & Home Care and Beauty Care businesses. In the first half of 2020, Adhesives Technologies' organic sales declined by 10.9% dragged down by shutdowns in the automotive, metals, industrial and construction end-markets while Beauty Care suffered from significant declines in Hair Professional due to salon closures. However, Laundry & Home Care benefitted from the increased hygiene awareness in Covid-19 environment, posting a 4.9% organic growth in sales.

Moody's expects Henkel's group revenue to decline by 5-7% in 2020 (down 6% in H1 2020), before returning to growth in 2021. The group continues to benefit from higher growth in Emerging Markets, where it generates around 40% of its sales. In its macroeconomic forecast Moody's anticipates a 5.9% real GDP growth in 2021 (-1.6% in 2020) among G-20 emerging countries compared to 4.9% growth (-6.5% in 2020) in G-20 advanced countries.

Over the past years Henkel has built a strong track record of keeping solid credit metrics despite market volatility or M&A activity. Its gross leverage (Moody's adjusted gross debt/ EBITDA) remained at 1.4x for the last four years in a row and its net leverage stayed at around 0.9x -- 1.1x. Moreover, its gross (net) leverage was below 1.8x (1.1x) for the last decade, compared to our guidance range of 1.0x -- 2.5x for the A2 rating. Despite a 23% year on year decline in EBITDA (Moody's adjusted) in H1 '20, Henkel's gross (net) leverage increased by merely 0.3x (stayed flat) to 1.7x (0.9x) at the end of June 2020. Moody's expects the gross leverage ratio to remain well within the trigger range even in an adverse scenario of a prolonged economic recession.

Henkel's free cash flow (FCF) generation is strong -- its FCF/ debt ratio (Moody's adjusted) averaged 31% in the last decade (26% in the last 12 months ended June 2020). Retained cash flow to net debt stood at 59% at the end of June 2020, well above our trigger range of 30% - 40% for the current rating. The difficult H1 '20 did not change much in its FCF that declined by less than €100 million to €1.4 billion on the last twelve months basis, mainly thanks to reduced working capital. Moody's expects Henkel to continue generating positive FCF while retaining solid liquidity, which should support a solid positioning in the A2 rating category going forward.

The company's financial policy considers acquisitions to be an integral part of its growth strategy. However, since the acquisition of the US-based laundry and home care company Sun Products Corporation in September 2016 for $3.6 billion, the company undertook rather bolt-on acquisitions in recent years spending around €0.5 billion in each 2018 and 2019. Also in H1 '20 the company said to have signed deals for a total of €0.5 billion that will be paid out in the second half of the year. At the same time, Henkel has announced its intention to dispose or discontinue brands and categories with around €0.5 billion in sales. Moody's expects that the company would not jeopardise its commitment to a single-A rating when assessing potential further acquisitions.

RATIONALE FOR STABLE OUTLOOK

The stable rating outlook reflects our expectation that Henkel will maintain its gross leverage (Moody's-adjusted) ratio below 2.0x and retained cash flow (RCF)/net debt above 30% on a sustained basis.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Positive rating pressure could arise if:

• Moody's adjusted gross leverage were to remain below 1.0x for an extended period;

• Moody's adjusted retained cash flow/ net debt ratio were to remain above 40%;

• The group were to maintain an EBITA margin (Moody's adjusted) at or above the mid-teens in percentage terms on a sustained basis

Before considering a rating upgrade, we would factor in some event risk in our assessment, resulting from the company's financial policy that does not rule out major acquisitions.

Conversely, negative rating pressure could arise if:

• Moody's adjusted gross leverage were to increase towards 2.5x;

• Moody's adjusted retained cash flow/ net debt ratio were to decline below 30% on a sustained basis;

• The group were to adopt a more shareholder-friendly policy or undertake aggressive acquisitions

LIQUIDITY

Moody's considers Henkel's liquidity as solid. As of 30 June 2020, the company had €2.6 billion in cash and marketable securities, as well as an access to €1.5 billion undrawn dual-currency revolving credit facility, maturing in December 2024. Moody's expects Henkel's FCF and available liquidity sources to exceed by far its liquidity needs for the next 12 months.

Compared with that of its peers, Henkel's debt maturity profile is relatively short term. In the next 12 months the company faces a €700 million bond maturity in September 2021. Moreover, by the end of Q2 2020 Henkel had around €2.1 billion of commercial papers (CP) outstanding, according to Moody's estimates. Under its CP program Henkel can issue up to €2 billion in each euro and the US dollar.

ESG CONSIDERATIONS

Moody's takes into account the impact of ESG factors when assessing companies' credit quality. In case of Henkel, the environmental and social risks are not significant. However, the company has committed to addressing those possible risks and improve its environmental profile by using sustainable materials, developing smart packaging solutions and establishing a circular economy. By 2025, Henkel wants all of its packaging to be recyclable, reusable or compostable, and wants to reduce the use of fossil based virgin plastics by 50%.

Henkel adheres to the German Corporate Governance Code for listed companies. In terms of its legal structure, a KGaA is a mixture of a joint-stock corporation and a limited partnership, with a leaning towards stock corporation law. The rights and duties of the supervisory board of a KGaA are more limited compared with those of the supervisory board of a joint-stock corporation. The Henkel family members hold around 62% of Henkel's ordinary shares in a share-pooling agreement, while preferred shares are significantly more liquid and are entirely in free float. The preferred shares grant to their holders all shareholder rights apart from the right to vote.

The rating takes into consideration the company's conservative financial policy, including its commitment to a single-A rating, while considering acquisitions an integral part of the growth strategy.

LIST OF AFFECTED RATINGS

..Issuer: Henkel AG & Co. KGaA

Affirmations:

....Commercial Paper, Affirmed P-1

....Other Short Term, Affirmed (P)P-1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A2

....Senior Unsecured Regular Bond/Debenture, Affirmed A2

Outlook Actions:

....Outlook, Remains Stable

..Issuer: Henkel of America Inc

Affirmations:

....Senior Unsecured Commercial Paper (Local Currency), Affirmed P-1

Outlook Actions:

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Consumer Packaged Goods Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1202237. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Düsseldorf, Germany, Henkel AG & Co. KGaA (Henkel) is the world's leading producer of adhesives for consumers, craftsmen and buildings, as well as industrial segments, accounting for around half of the company's revenue. Henkel is also one of the world's leading producers of home and beauty care products, such as heavy-duty and special detergents, household cleaners and hair cosmetics, which together account for the other half of its revenue. In the 12 months ended June 2020, Henkel generated €19.5 billion in revenue and €2.8 billion in company-adjusted EBIT, and employed 52,450 people worldwide.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Vitali Morgovski, CFA
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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