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Rating Action:

Moody's affirms SKF's Baa1 rating; outlook stable

01 Jun 2020

Stockholm, June 01, 2020 -- Moody's Investors Service, ("Moody's") has today affirmed SKF AB's ("SKF") Baa1 senior unsecured ratings. The outlook remains stable.

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

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The coronavirus outbreak, resulting in the shutdown of economies and complete productions stops, will make 2020 a difficult year for the capital goods sector in general and the automotive sector in particular, two sectors to which SKF has significant exposure to.

SKF has a strong operational track record of managing its business through various industry cycles, as evidenced by the company's underlying EBITA margin being above 10% in the majority of last years and a track record of positive free cash flow generation. Moody's expects the coronavirus crisis to negatively impact operating performance in 2020, causing credit metrics to be weak for the Baa1 rating category. The affirmation of the Baa1 rating with a stable outlook reflects the expectation of continued positive free cash flow generation, supported by a reduction of dividend payouts for 2020 as well as SKF's strong liquidity profile. The stable outlook reflects the expectation of a normalization of SKF's operating performance and a recovery of credit metrics in 2021 and beyond.

The affirmation of SKF's Baa1 rating also rests on its good level of diversification in terms of end-markets, customers and geographies, which, together with high share of services and aftermarket content, help reduce the volatility of results. Nevertheless, it does operate in cyclical end-markets, often with short lead times, which require the timely adjustment of its cost structure to protect margins against demand swings and pricing pressure.

RATING OUTLOOK

The stable outlook is anchored in SKF's strong business profile, the ability to generate free cash flow through volatile market environments as well as a very strong liquidity profile -- SEK12.9 billion in cash and revolving credit facilities of SEK7.9 billion, all undrawn, as of March 31, 2020. In addition, SKF has access to a SEK3 billion credit guarantee from the Swedish Credit Export Agency EKN. Although Moody's expects debt/EBTDA to stay elevated over the next 12-18 months ,3.1x -- 4.2x, following a revenue contraction of around 15% in 2020 and an increase of 10% in 2021, the company's relatively low financial debt (including leases) yields a capital structure that is still commensurate with the assigned rating over the cycle. Still, the stable outlook relies on SKF's ability to generate positive free cash flow despite a difficult market environment.

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

WHAT COULD CHANGE THE RATING UP

» Moody's-adjusted debt/EBITDA of 1.5x

» Moody's-adjusted RCF/net debt above 30% on a sustained basis

WHAT COULD CHANGE THE RATING DOWN

» Moody's-adjusted EBITA margin sustainably below 10%

» Moody's-adjusted debt/EBITDA sustainably above 2.5x

» Moody's-adjusted RCF/net debt trending towards 20%

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Gothenburg, Sweden, SKF AB (SKF) is one of the leading suppliers of roller bearings, seals, mechatronics (that is, integration of mechanical and electronic engineering with software engineering), services and lubrication systems, operating in more than 130 countries with a global manufacturing and distribution footprint. The group's business is organised into two business areas: industrial (around 70% of group revenue) and automotive (around 30%).

For the 12 months ending March 2020, SKF generated sales of SEK85 billion through its workforce of more than 43,000 employees. As of 30 April 2020, SKF's largest shareholder was the Wallenberg family, holding 13.8% of share capital and 29.0% of the voting rights through Foundation Asset Management AB.

LIST OF AFFECTED RATINGS

..Issuer: SKF AB

Affirmations:

....Senior Unsecured Regular Bond/Debenture, Affirmed at Baa1

Outlook Actions:

....Outlook, Remains Stable

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.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

Daniel Harlid
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm 111 43
Sweden
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 Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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