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Rating Action:

Moody's changes Continental's outlook to negative, affirms Baa1/P-2 ratings

28 Aug 2019

Frankfurt am Main, August 28, 2019 -- Moody's Investors Service ("Moody's") has today changed the outlook on the ratings of German automotive supplier Continental AG (Continental, or the group), to negative from stable. Concurrently, Moody's has affirmed Continental's Baa1 long term issuer and senior unsecured ratings, the (P)Baa1 debt issuance program ratings of Continental, Continental Rubber of America, Corp. and Conti-Gummi Finance BV and the Prime-2 (P-2) short-term ratings of Continental Rubber of America, Corp.

"The outlook change on Continental's ratings reflects the overall more negative sector environment for European automotive parts suppliers and the resulting pressure on Continental's profit margins and financial metrics", says Matthias Heck, a Moody's Vice President -- Senior Credit Officer, and Lead Analyst for Continental. "A further deterioration of margins, an increase in leverage or a weakening in Continental's liquidity would likely result in a rating downgrade." added Mr. Heck.

RATINGS RATIONALE

The negative outlook reflects challenges for Continental to sustain its credit metrics in line with Moody's expectations for the Baa1 issuer rating, such as maintaining (i) debt / EBITDA ratio of not more than 2.0x (Moody's adjusted; 1.9x in the last twelve months to June 2019); EBITA margins of at least 10% (8.4% as of June 2019), and (iii) RCF/net debt of at least 40% (39.5% as of June 2019). Besides the current market weakness, Moody's believes that slowing macro growth, an increasingly likely hard Brexit and any potential acceleration of trade disputes such as between China and the US are additional risk factors that could make it harder for Continental to recover its operating profit margins next year.

On 22 July 2019, Continental revised its guidance for fiscal 2019 downwards in terms of revenues (new expectation EUR44 billion -- EUR45 billion), margins (new expectation: 7.0% to 7.5% company adjusted EBIT margin) and free cash flows (new expectation EUR1.2 billion to EUR1.4 billion, including IFRS 16, excluding carve-out effects). The downward revision was primarily driven by Continental's expectation, that global light vehicle production will decrease by around 5%, compared to the previously expected flat production levels versus 2018. Continental also indicated that it is preparing further measures to improve its performance and cost management, but has not quantified them so far.

The expected decline in production will put considerable pressure on margins in Continental's automotive group division, where the company now expects its adjusted EBIT margin to decline to about 4.2% to 4.8%, after 7% in 2018 and 8.2% in 2017. There is also some margin pressure in Continental's rubber group. Adjusted EBIT margins are expected in a range of 12.0% to 12.5% in 2019, after 13.6% in 2018 and even 15.4% in 2017.

The revision of Continental's expectations is in line with public statements of other European automotive parts suppliers. It illustrates the high cyclicality of the automotive industry and the limited visibility the company has over the next couple of quarters.

Moody's has a negative outlook on Europe's automotive parts suppliers' sector, anticipating a 3.8% decline in global light vehicle sales in 2019 and another 0.9% decline in 2020. The negative sector outlook also incorporates the expectation that margins in the sector will decline by 100-150 basis points in 2019, with no significant recovery in 2020.

RATIONALE FOR THE RATING AFFIRMATION

Continental's Baa1 long term issuer rating takes into consideration the company's (a) strong business profile as the third largest Tier 1 global auto supplier with revenues of over EUR44 billion in 2018; (b) diversity across multiple business areas and product lines; (c) leading position both in tires and industrial-facing businesses which reduces exposure to the original equipment (OE) automotive industry; (d) significant proportion of revenues from the replacement tire aftermarket which is less cyclical than for new equipment sales; (e) excellent positioning to mitigate the disruptive trends facing the automotive industry and (f) strong credit metrics with leverage (as measured by Moody's adjusted debt / EBITDA) of 1.9x and retained cash flow (RCF) / net debt of 39.5% as of June 2019.

Nevertheless, the rating reflects as negative the company's: (a) exposure to the cyclicality of the automotive industry; (b) high research & development (R&D) costs within the automotive business, albeit similar to peers; (c) exposure to volatile raw material prices and foreign exchange rates, (d) credit risks related to a potential demerger into two or more units.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's might consider downgrading Continental's ratings to Baa2 in case of (1) an increase in leverage (debt/EBITDA) to above 2.0x for a prolonged period (1.9x as of June 2019); (2) the RCF/net debt coverage ratio falling below 40% (39.5% as of June 2019); (3) a sustainable decline in adjusted EBITA margin below 10% (as of June 2019: 8.4%); or (4) a deterioration in Continental's liquidity profile.

The ratings could be upgraded to A3 if Continental is able to (1) demonstrate a sustainable Moody's-adjusted free cash flow generation in excess of EUR1 billion per annum, that would be applied to (2) a further debt reduction leading to a decline in Moody's leverage (debt/EBITDA) of constantly below 1.5x; (3) achieve an EBITA margin (as defined by Moody's) sustainably above 12.5%; and (4) an RCF/net debt above 60%.

LIST OF AFFECTED RATINGS:

..Issuer: Conti-Gummi Finance BV

Affirmation:

....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

Outlook Actions:

....Outlook, Changed To Negative From Stable

..Issuer: Continental AG

Affirmations:

.... LT Issuer Rating, Affirmed Baa1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

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

Outlook Actions:

....Outlook, Changed To Negative From Stable

..Issuer: Continental Rubber of America, Corp.

Affirmations:

.... ST Issuer Rating, Affirmed P-2

.....BACKED Commercial Paper, Affirmed P-2

.....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

Outlook Actions:

....Outlook, Changed To Negative From Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Automotive Supplier Industry published in June 2016. 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.

Matthias Heck, CFA
VP - Senior Credit Officer
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

Anke Rindermann
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

No Related Data.
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