Frankfurt am Main, March 27, 2020 -- Moody's Investors Service, ("Moody's") has
today affirmed the Baa3 Long Term Issuer rating of German manufacturing
company Voith GmbH & Co. KGaA ("Voith"). Concurrently,
Moody's changed the outlook of Voith to negative from stable.
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 manufacturing industry
has been one of the sectors most significantly affected by the shock given
its sensitivity to consumer demand and sentiment. More specifically,
the weaknesses in Voith's credit profile, including its exposure
to the automotive industry have left it vulnerable to shifts in market
sentiment in these unprecedented operating conditions and Voith remains
vulnerable to the outbreak continuing to spread. We regard the
coronavirus outbreak as a social risk under our ESG framework, given
the substantial implications for public health and safety. Today's
action reflects the impact on Voith of the breadth and severity of the
shock, and the broad deterioration in credit quality it has triggered.
"The decision to affirm Voith's Baa3 rating reflects a solid order book
equal to 1.3x of annual sales, which, together with
a strong liquidity position and a long-term debt maturity profile,
provides some good protection in the current adverse economic environment",
said Oliver Giani, Moody's lead analyst for Voith. "While
Voith Turbo is expected to face difficult times, Voith Hydro and
Voith Paper should be less affected", he added.
The outlook change to negative reflects the fact that Voith will be challenged
to strengthen the profitability of its core business and meet the expectations
set for the Baa3 rating category over the next quarters. 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 and Moody's will closely monitor how Voith performs
during the crisis and implements offsetting operational and financial
measures. In particular, a weakening of the liquidity profile
as a consequence of negative free cash flow generation could add pressure
on the rating. Moody's may revisit the rating shortly in
case of the company not meeting expectations.
RATINGS RATIONALE
Voith's rating is supported by its (1) market and technology leadership
in many of its relevant markets, such as hydro power plants and
paper machines; (2) very diversified and well-balanced portfolio,
with the group serving many end markets, which typically follow
different cycles in terms of length and timing, backed by a healthy
order backlog in excess of one year of sales; (3) strong liquidity
profile and substantial financial flexibility, given cash and cash
equivalents of more than €500 million; and (4) relatively conservative
financial policy.
However, Voith's rating is constrained by (1) the cyclical nature
of most of its end-customer industries; (2) its weak profitability,
to some extent reflecting start-up losses of the new division Voith
Digital Ventures which is expected to reach break-even by 2021
at the latest; (3) its high adjusted (gross) leverage mirroring the
weak profitability; and (4) its exposure to the structurally changing
paper industry through its Paper division, which required extensive
restructuring measures during 2013-16.
ESG CONSIDERATIONS
Moody's regards the coronavirus outbreak as a social risk under
its ESG framework, given the substantial implications for public
health and safety. In the field of governance, as a family-owned
business, Voith follows a long-term oriented financial policy.
Lasting financial independence is a key value for Voith. The financial
policy mirrors this, as reflected by the fact that almost all of
the sizeable gain from the sale of the company's stake in KUKA AG
has been used to increase the company's equity position rather than
to distribute the sale proceeds to the family shareholders.
LIQUIDITY
Moody's considers Voith's liquidity to be strong and a key driver
of the Baa3 rating. Taking into account €356 million invested
in term deposits at selected banking partners and deducting trapped cash,
the company had more than €500 million of cash and cash equivalents
on its balance sheet as of 30 September 2019. This strong cash
balance is further supported by an undrawn €550 million multicurrency
syndicated credit facility, which was refinanced in April 2018 and
matures in April 2024. The facility has no repeating material adverse
change (MAC) clause or financial covenants but contains a one-year
extension option, with the possibility to increase the credit volume
to a maximum of €750 million. Voith's liquidity is also supported
by certain bilateral committed credit facilities. These sources
are sufficient to cover liquidity needs, including any intra-year
movements of working capital and short-term debt maturities of
€65 million as well as the purchase price for the acquisition of
BTG. Early 2020 Voith strengthened its liquidity further by issuing
a €400 million Schuldschein (private placement notes), proceeds
of which are earmarked to early refinance its upcoming debt maturities
as well as to fund the cash outflow for the acquisitions of BTG,
Elin and Toscotec.
WHAT COULD CHANGE THE RATING UP / DOWN
Moody's could downgrade Voith's ratings, if its strong liquidity
profile is weakened or if it becomes unlikely that the company will be
able to sustainably strengthen its credit profile indicated by the company's
inability to move Moody's-adjusted debt/EBITDA below 4.0x,
Moody's-adjusted RCF/net debt below 25% or free cash flow
remaining negative for a prolonged period of time.
Albeit unlikely for the moment, Moody's would consider upgrading
the rating of Voith in case of a sustainable strengthening of its credit
profile reflected in a Moody's adjusted EBITA margin in the high single
digits and Moody's-adjusted debt/EBITDA well below 3.0x.
The principal methodology used in this rating was Manufacturing Methodology
published in March 2020. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
Voith is a diversified engineering group, addressing primarily energy,
oil & gas, paper, raw materials, and transport &
automotive markets. Its product offerings hold leading positions
in hydropower generation, paper machine technology and selected
niches of technical services and power transmission. Voith employed
some 19,400 people in more than 60 countries and generated sales
of €4.3 billion in its fiscal year ended 30 September 2019.
The group is privately owned by descendants of the Voith family,
but has been led by nonfamily senior managers for decades.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Manufacturing Methodology
published in March 2020. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
Oliver Giani
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
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
