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Rating Action:

Moody's assigns (P)Baa3 rating to GEA's unsecured bond (Germany)

Global Credit Research - 14 Apr 2011

Approximately €350 million senior notes to be issued

Frankfurt am Main, April 14, 2011 -- Moody's Investor's Service today assigned a provisional (P)Baa3 rating to the proposed €350 million senior unsecured notes due in 2016 to be issued by GEA Group Aktiengesellschaft ("GEA" or the "Issuer").

Moody's issues provisional ratings for debt instruments in advance of the final sale of securities or conclusion of credit agreements. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the different capital instruments. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

The (P)Baa3 rating assigned reflects (i) GEA's strong market position in selected process engineering and equipment manufacturing businesses to promote efficiency in food and energy industries; (ii) its significant share of sales exposed to the less cyclical food and beverage industry and business visibility supported by order backlog; and (iii) improving cost structure and operating flexibility through cost saving and complexity reduction measures, as well as (iv) an unlevered capital structure with an increased net cash position (before Moody's adjustments) at FYE 2010 compared to 2009.

Key factors constraining the ratings are (i) still subdued sales level compared to 2008, despite increasing order intake in the aftermath of the downturn; (ii) the challenge to optimize its manufacturing capacity and cost structure to absorb underutilization and raw material price increases to return to pre-crisis operating margin; (iii) the strategic capital deployment to acquisitions and shareholder distributions in the long term to make capital use more efficient; (iv) a leverage of lease- and pension-adjusted debt/EBITDA of 3.4x which positions the company at the lower end of the current rating category; and (v) the risk of higher than expected cash payments related to discontinued operations.

The proceeds of the issuance of the notes will be used to partly refinance the acquisition of the Netherlands-based Convenience Food Systems (CFS) and the German company Bock Kältemaschinen GmbH, both announced in December 2010 and successfully concluded end of March. The remainder of the total purchase price of about €490 million, will be financed with existing credit facilities and cash in hand. The acquired companies fit well into GEA's strategy to focus its activities towards the less cyclical food business. Despite the substantial increase in GEA's leverage post acquisitions, Moody's expects GEA to be able to consummate the transactions within the Baa3 rating category, supported by the currently positive trend in order intake, ongoing profitability improvement from restructuring measures as well as GEA's track record of strong cash generation. However, we note that the acquisitions have largely exhausted the headroom that GEA had at its current Baa3 level, leaving limited scope for further acquisitions and operational underperformance in the near future.

The rating outlook of GEA is stable. We expect GEA to gradually improve its operating performance from the trough amid a strongly improved order trend, while maintaining capital expenditure discipline and limiting cash outflows related to its discontinued operations. As the strong period of 2007 and 2008 is not expected to return anytime soon, the resilience of GEA's operating margin in the high single digit range and the return of Debt/EBITDA below 3x are critical to its Baa3 rating. An uptrend in the operating performance towards pre-crisis levels would nevertheless positively affect the rating.

We would consider upgrading the rating, if liabilities from discontinued operations do not constitute a significant cash drain to the group in future and if GEA can prove the resilience of its business model over the business cycle, i.e. defending a EBITA-margin above 9% while limiting debt leverage sustainably at a level around 2.0x of EBITDA, as well as a FCF/Debt ratio moving towards 10%.

Negative rating pressure could result from EBITA-margins falling below 6%, a significantly reduced cash flow generation, mirrored for instance by material negative free cash flow, potential concerns regarding GEA's short-term liquidity profile, or if leverage stays above 3.0x Debt / EBITDA.

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

GEA Group Aktiengesellschaft ("GEA") is an international group focused on speciality mechanical engineering -- especially for the food and energy industries. The group generated sales of €4.4 billion from continuing operations in the fiscal year ending 31 December 2010. GEA recorded a market capitalisation of €4.2 billion as of end March 2011.

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.

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

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Frankfurt am Main
Oliver Giani
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

Moody's Deutschland GmbH
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Moody's assigns (P)Baa3 rating to GEA's unsecured bond (Germany)
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