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Rating Action:

Moody's affirms IHO Verwaltung's Ba2 ratings; changes outlook to stable from negative

17 Aug 2021

Frankfurt am Main, August 17, 2021 -- Moody's Investors Service ("Moody's") has today changed to stable from negative the outlook on all ratings of IHO Verwaltungs GmbH ("IHO-V" or "group"). Moody's further affirmed the corporate family rating (CFR) and senior secured instrument ratings at Ba2 and the probability of default rating (PDR) at Ba2-PD.

"The stabilization of the outlook reflects the strong results improvements and recovery in the share prices of Continental AG and Schaeffler AG, IHO-V's two main investments, since we moved the outlook to negative in June last year," said Goetz Grossmann, a Moody's Vice President and Lead Analyst for IHO-V. "Assuming further performance improvements at both investees, we expect IHO-V's credit metrics to reach solid levels for the affirmed Ba2 rating over the next 12-18 months and its liquidity to remain good at all times."

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

RATINGS RATIONALE

The outlook change to stable from negative is primarily driven by the recent improvement of IHO-V's market value-based net leverage (MVL) of approximately 27% as of 31 July 2021. Thanks to a considerable recovery of the share prices of Continental AG (Continental) and Schaeffler AG (SAG) from their very low levels after the coronavirus outbreak in Q2 2020, IHO-V's MVL noticeably reduced in the following months and has been trending below 30% since the end of 2020. While these are strong levels for the affirmed Ba2 rating, for which Moody's expects the MVL in a range of 30%-40%, the ratio remains susceptible to the volatility in SAG's and Continental's share prices, as illustrated in 2020 when it reached almost 60%.

The rating action further recognizes the rapid rebound in the operating performance of Continental and SAG from the second half of 2020 (H2 2020), although IHO's Moody's-adjusted credit metrics based on the consolidated financials of SAG and Continental still need to improve for the Ba2 rating, namely an EBITA margin of at least 8% and a leverage ratio of 3x debt/EBITDA or lower. While latest metrics are to a large extent still burdened by significant restructuring costs incurred in H2 2020 both at Continental and SAG, Moody's forecasts much lower restructuring charges for this and next year and IHO-V's adjusted metrics to recover to levels commensurate with a Ba2 rating by the end of 2022. Expected further considerable performance improvements at Continental and SAG should be fueled by Moody's projected growth in global light vehicles sales by 7.1% and 6% in 2021 and 2022, respectively, as well as efficiency gains from ongoing restructuring.

In terms of IHO-V's FFO interest cover, which will deteriorate to around 0.5x this year after Continental's decision to suspend dividend payments, Moody's expects the ratio to clearly strengthen to a solid level for the Ba2 rating (2x-2.5x) in 2022. The expected improvement will be driven by the assumption of Continental to resume dividend payments in 2022 in line with its historical payout ratios and dividend collections from SAG to materially increase on a projected strong recovery in its earnings this year.

The affirmed Ba2 CFR further benefits from IHO-V's (1) good liquidity profile, with no major debt maturities before 2024; (2) substantial size; and (3) ownership of sizeable stakes in high-quality assets in Schaeffler and Continental, both being publicly listed and highly rated (Continental AG at Baa2, Schaeffler AG at Ba1).

IHO-V's ratings remain constrained by (1) a fairly high concentration risk, with IHO-V being solely dependent on the dividends received from only two assets that are largely active in the cyclical automotive industry; (2) a lack of clearly defined financial policies aimed at preserving a conservative capital structure, offsetting the fairly high concentration risk; and (3) a somewhat limited, but improved, level of reporting at the IHO-V standalone level.

LIQUIDITY

Moody's regards IHO-V's liquidity as good. As of year-end 2020, IHO-V had €236 million cash and cash equivalents and access to €400 million under its committed €800 million revolving facility, maturing in December 2024. This facility has one net leverage covenant (net debt/EBITDA, calculated on IHO-V's and SAG's consolidated accounts), which was renegotiated in 2020 until March 2021 (7.0x) and March 2022 (6.5x). There is currently ample capacity under the covenant, and Moody's expects the capacity to further increase on a projected strong improvement in SAG's operating performance through 2021-22. Since February 2021, IHO-V has further access to a €400 million bridge facility with a 12-month availability period and "6+6" extension option with first extension at the discretion of IHO, second extension is with the banks. There are no debt maturities until 2024.

In its liquidity analysis for IHO-V, Moody's compares cash inflows (which are the dividends received from SAG and Continental) with cash outflows (costs and taxes, interest and dividends paid). For 2021, based on the dividend payments of SAG only (IHO-V share €120 million), Moody's expects cash inflows to be insufficient to cover short-term cash needs. For holding costs and taxes, Moody's assumes some €50 million, and for interest paid around €150 million, taking into account a 3.8% average effective interest rate and currency hedging effects. In 2021, no dividend payments from IHO-V to IHO Beteiligungs GmbH are to be expected.

For 2022, Moody's assumes dividends received from SAG within the 30%-50% of net income range and Continental to resume dividend payments in line with its historical payout ratios (25%-33%) before the 2021 suspension. These payments should enable IHO-V to comfortably cover its short-term cash needs again from next year.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectations that IHO's credit metrics will improve to solid levels for the Ba2 rating over the next 12-18 months. While its market value-based net leverage of currently below 30% is in line with a higher rating, sustainability in this metric, which has been highly volatile during the last 12 months, would be needed for positive rating pressure. Assuming Continental to resume dividend payments next year, Moody's expects IHO-V's recently weakened FFO interest cover to recover to well above 2x in 2022 and its liquidity to remain good.

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

An upgrade of IHO-V's ratings would require (1) a market value-based net leverage of 30% or less, and (2) FFO interest cover above 2.5x on a sustainable basis. An upgrade would also require (3) Moody's adjusted debt/EBITDA to be sustained below 2.5x and Moody's adjusted EBITA margin to be improved to around 10%, both based on INA-Holding Schaeffler GmbH & Co. KG's financial statements that fully consolidate Schaeffler AG and Continental AG. An upgrade would also require (4) improved reporting at IHO-V level.

Moody's could downgrade IHO-V's ratings if its (1) market value-based net leverage sustainably exceeds 40%; (2) FFO interest cover deteriorates below 2.0x on a sustainable basis; (3) Moody's adjusted debt/EBITDA remains above 3.0x and Moody's adjusted EBITA margin fails to recover to above 8% for a prolonged period of time, both based on INA-Holding Schaeffler GmbH & Co. KG statements that fully consolidate Schaeffler AG and Continental AG; or (4) liquidity deteriorates.

LIST OF AFFECTED RATINGS

..Issuer: IHO Verwaltungs GmbH

Affirmations:

.... Probability of Default Rating, Affirmed Ba2-PD

.... LT Corporate Family Rating, Affirmed Ba2

....Senior Secured Regular Bond/Debenture, Affirmed Ba2

Outlook Actions:

....Outlook, Changed To Stable From Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Automotive Suppliers published in May 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276105. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Herzogenaurach, Germany, IHO Verwaltungs GmbH (IHO-V) is a holding company that owns 75% of share capital (and 100% of voting rights) in SAG and 36% of share capital in Continental AG. Both these assets are leading automotive suppliers in Europe. IHO-V is ultimately owned through a holding structure by two members of the Schaeffler family.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Goetz Grossmann, CFA
Vice President - Senior 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

Anke Rindermann
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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