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Rating Action:

Moody's assigns Ba3 rating to Conti's bond issuance

10 Sep 2012

Approximately USD500 million of debt affected

Frankfurt am Main, September 10, 2012 -- Moody's Investors Service has today assigned a Ba3 rating and a loss-given-default (LGD) of 4 to Continental AG's ("Conti") proposed senior secured notes with a minimum amount of USD500 million. The bonds are issued by Conti's wholly owned subsidiary Continental Rubber of America, Corp ("CRoA") benefitting from an unconditional and irrevocable guarantee of Continental AG (Ba3 with a stable outlook) and certain of its subsidiaries. Conti's Ba3 corporate family rating (CFR) and Ba3 probability of default rating (PDR) are not affected. The outlook on all ratings is stable.

RATINGS RATIONALE

"The rating reflects that the planned bond will be unconditionally and irrevocably guaranteed by Continental AG and certain subsidiaries which in aggregate represent around 85% of group EBITDA and 86% of total assets for the twelve-months period ended 30 June 2012. Consequently, the rating of the bond is at the same level as the parent's corporate family rating" says Falk Frey, a Moody's Senior Vice President and lead analyst for Conti.

Continental's current leverage with debt/EBITDA of 2.4x and profitability with EBIT-margins of 9.1% for the last twelve months ended 30 June 2012 would indicate a higher rating in the high Ba category, than the currently assigned Ba3 rating. However, its rating is held back by the uncertainty associated with the possible form and pace of a potential combination of Continental AG and its major shareholder Schaeffler (rated B2 stable), which reportedly has a high debt level following its investment in Conti.

At this time we see the risk to noteholders is mitigated primarily by financial covenants in the bond and loan documentation that restrict Conti's ability to (i) dispose of the rubber group, or (ii) merge with entities of the Schaeffler group, unless certain interest coverage and leverage tests are met with regard to metrics pro-forma for the respective transactions as well as (iii) a restriction on the total dividend payout.

In addition, the successful refinancing of Schaeffler's debt structure in the first quarter of 2012, including the reduction of its stakeholding in Conti from 75% (directly and indirectly via 2 banks) to 60% might lengthen the timeframe for a potential combination with Conti. Schaeffler's strong improvement in operating performance reported for financial years 2010 and 2011 and the expectation that this development would be sustained going forward should also lead to an improvement of Schaeffler's credit profile over time. Nevertheless, Moody's would expect to re-assess the position of all lenders if and when major corporate transactions are agreed upon.

Conti is currently very strongly positioned in its rating category, and credit metrics on a standalone basis would justify a higher rating. The stable outlook, however, incorporates the ongoing uncertainties with regard to the the high debt load of Conti's major shareholder Schaeffler, which is rated B2/stable. The stable outlook also incorporates the expectation and future ability of Conti to pay out more sizeable dividends, which would have a negative effect on its cash flow generation ability.

A rating upgrade for Conti's ratings would also depend on the further development of the capital structure and leverage of its majority shareholder, Schaeffler. A rating upgrade would require either a positive rating trajectory of Schaeffler or the removal of the pending uncertainty about how the Schaeffler/Conti relationship will develop further. Absent of these factors Conti's ratings could be upgraded should (i) the company be able to further reduce its leverage, exemplified by Debt/EBITDA as adjusted by Moody's towards 2.0x (per last twelve months as of June 2012: 2.4x); (ii) free cash flow generation of EUR500 million as defined by Moody's materialise in the current year, which has been burdened by the pay out of a EUR300 million dividend in 2012; (iii) interest coverage to remain above 3.0x as well as (iv) RCF/Net Debt remain above 25%.

A downgrade of Conti's ratings could be envisaged should operating performance and leverage deteriorate materially below 2010 levels exemplified by (i) Debt / EBITDA as adjusted by Moody's approaching 4.0x; (ii) a free cash flow generation below EUR200 million; (iii) a decline in the reported adjusted EBIT margin below 7% as well as in case of any re-leverage resulting from a combination with Schaeffler.

As of 30 June 2012 Conti's liquidity needs for the next 12 months resulting from debt maturities as well as cash outflows for capital expenditure, working capital and day to day needs would be covered by a sizable cash position (around EUR1.4 billion as of 30 June 2012), the proceeds from the envisaged bond issuance and its revolving credit facility with conditionality language and covenants with sufficient headroom.

At the same time we note that Conti has a sizeable debt maturity of a term loan in an amount of EUR2.9 billion and revolving credit facility with a commitment of EUR2.5 billion in 2014. The current rating incorporates our expectation that these will be refinanced well in advance before they fall due. The envisaged bond issuance is a first step towards this target as proceeds will be used to repay part of Conti's term loan outstanding under the syndicated facility agreement dated 22 August 2007.

STRUCTURAL CONSIDERATIONS

Moody's ranks Conti's indebtedness which is secured by bank guarantees, such as a EUR300 million loan provided by EIB, at the top of the debt waterfall ahead of all other creditors. The currently EUR3.0 billion worth of notes issued by Conti-Gummi Finance B.V., the newly issued bonds by Continental Rubber of America, Corp. and the debt outstanding under the syndicated facility agreement which all benefit from upstream guarantees and are secured by share pledges, intercompany loans and cash pool accounts rank in line with all unsecured creditors, trade debtors, pension obligations as well as lease rejection claims at the lower end of the debt waterfall.

The principal methodology used in rating Continental Rubber of America Corporation was the Global Automotive Supplier Industry Methodology published in January 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Hanover, Germany, Continental AG is one of the top automotive suppliers worldwide in the areas of brake systems, systems and components for powertrains and chassis, instrumentation, infotainment solutions, vehicle electronics, technical elastomers as well as the world's fourth-largest manufacturer of passenger and commercial vehicle tires. In the last twelve months ended 30 June 2012, Continental generated consolidated sales of approx. EUR32 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

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

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information..

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Falk Frey
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Matthias Hellstern
Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

Moody's assigns Ba3 rating to Conti's bond issuance
No Related Data.
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