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Rating Action:

Moody's assigns (P)B2 corporate family rating to KUKA; outlook stable (Germany)

09 Nov 2010

KUKA's EUR200 million notes rated (P)B3; first-time ratings

Frankfurt am Main, November 09, 2010 -- Moody's Investors Service has today assigned a provisional (P)B2 corporate family rating (CFR) and a (P)B2 probability of default rating (PDR) to KUKA AG. At the same time, Moody's has assigned a provisional (P)B3, LGD4 (60%) rating to KUKA's proposed EUR200 million senior secured notes. The rating outlook is stable. This is the first time that Moody's has rated KUKA.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the notes. A definitive rating may differ from the provisional rating.

RATINGS RATIONALE

The (P)B2 CFR reflects KUKA's (i) solid market position in its key segments, namely Robotics (in which it ranks No.1 worldwide, with a 27% market share) and Systems (body-in-white, No.2 in Europe and US); (ii) its high level of innovation and technology leadership; (iii) its long-standing customer relationships, which mitigate the company's high level of customer concentration; as well as (iv) a streamlined cost base as a result of its ongoing cost reduction programme, which is expected to yield approximately EUR70 million in recurring cost savings by the end of 2010.

The rating also takes into account KUKA's successful implementation of a capital increase in June 2010, which resulted in proceeds of EUR45 million. Additionally, the rating considers the company's earnings recovery in the first 9 months 2010, when KUKA reported a positive EBIT of EUR13.3 million. This compares with KUKA's negative EBIT of EUR28.0 million in the same period 2009, also as a result of restructuring costs. Looking ahead, Moody's expects the company's earnings recovery to continue in Q4 2010 and beyond.

However, Moody's points out that KUKA's rating is constrained by a high reliance on the automotive sector, which is characterised by a limited number of large OEMs that exercise strong pricing power over its customers. Also, capital investments of the automotive OEMs are even more volatile than the highly cyclical industry itself and strongly exposed to the overall economic environment. Furthermore, the rating reflects KUKA's limited diversification in terms of geography (around 70% of 2009 revenues were generated in Europe) as well as existing overcapacities in the robotics sector, resulting in persistent pricing pressure. Moreover, the rating takes into account the company's limited scale relative to its much larger and more diversified key competitors, often large conglomerates.

Moody's rating assessment is based on the expectation that KUKA can broadly sustain the performance shown in H1 2010 and therefore achieve consolidated revenues of more than EUR1.0 billion and reported EBIT for FY 2010 in the range of EUR20-30 million (before restructuring costs and Moody's standard adjustments).

Moody's says that the assignment of a definitive B2 CFR to KUKA would be contingent upon the successful execution of the company's re-financing package that will include, among other factors, a committed three-year EUR50 million secured Revolving Credit Facility with comfortable headroom under its financial covenants (leverage, interest cover, gearing) as well as the successful placement of the proposed EUR200 million bond.

Subsequent to the finalisation of this re-financing, Moody's says that KUKA's liquidity profile -- including its cash position, the new revolving credit facility as well as funds from operations -- would be expected to fully cover all anticipated liquidity needs over the next 12 months, comprising debt maturities, working capital and day-to-day needs as well as capital expenditures.

The stable rating outlook incorporates Moody's expectation that KUKA will (i) successfully execute its refinancing plan, including a high-yield bond issue as well as a renewed syndicated credit facility with comfortable headroom under its covenants; (ii) be able to halt its cash burn in the current year, generate positive free cash flows thereafter and use the generated cash to reduce debt; and (iii) sustainably improve its operating performance and cash flow generation.

Moody's would consider downgrading KUKA's ratings in the event of (i) a continued cash burn evidenced by a negative free cash flow through H2 2010 and beyond; or (ii) the company's inability to improve the EBITA margin above 2.5% in the current year and/or an inability to further improve it above 4% in 2011; or (iii) a failure to de-leverage significantly with debt/EBITDA to be reduced to around 4.5x in 2011 and well below 4.0x thereafter.

Moody's would consider upgrading the ratings over the medium term if KUKA demonstrates continued improvements in operating and cash generation and a more robust performance through the cycle, as evidenced by (i) a sustained EBITA margin of above 5%; (ii) an interest coverage (EBIT/interest expenses) of at least 2.0x; as well as (iii) a positive free cash flow generation of EUR10 million a year or more.

The proposed EUR200 million senior secured notes will be issued by KUKA AG, the ultimate holding company, and will benefit from (i) guarantees provided by all material subsidiaries representing individually 5% or more of total assets, sales and EBITDA, with a minimum guarantor coverage of 80% of assets, sales and EBITDA; as well as (ii) certain receivables, inventories and intellectual property rights (iii) share pledges of larger sub-holdings and the pledge of bank accounts. The collateral for the notes will effectively rank as second liens behind the planned credit facility with super-priority ranking.

The rating agency believes that a family recovery rate of 50% (Moody's standard assumption for debt structures including bond and bank debt) is the most appropriate assumption for KUKA when applying Moody's Loss-Given-Default Methodology. This view is based on the rating agency's estimate of a distressed enterprise value in case of default. Given these assumptions, Moody's Loss-Given-Default Methodology results in a (P)B3 instrument rating for the EUR200 million senior secured notes with LGD4(60%). This provisional (P)B3 rating is based on draft documentation received so far and is subject to Moody's satisfactory review of final documentation.

Moody's understands that KUKA intends to use the proceeds of the EUR200 million notes (i) to refinance the outstanding convertible notes amounting to a nominal amount of approximately EUR69 million maturing in November 2011; (ii) as additional liquidity of approximately EUR120 million and (iii) to cover transaction expenses.

Assignments:

..Issuer: KUKA AG

....Probability of Default Rating, Assigned (P)B2

....Corporate Family Rating, Assigned (P)B2

....Senior Secured Regular Bond/Debenture, Assigned a range of 60 - LGD4 to (P)B3

The principal methodology used in this rating was Global Heavy Manufacturing Rating Methodology published in November 2009.

Headquartered in Augsburg, Germany, KUKA AG focuses on robot-supported automation of manufacturing processes and is thus active in the mechanical and plant engineering sector. The company has two divisions: KUKA Robotics and KUKA Systems, with the latter being by far the most important in terms of revenues, to which it contributed around 65% in 2009.

REGULATORY DISCLOSURES

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

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

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

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit 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.

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

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

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

Frankfurt am Main
Wolfgang Draack
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany

Moody's assigns (P)B2 corporate family rating to KUKA; outlook stable (Germany)
No Related Data.
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