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Rating Action:

Moody's changes outlook on Knorr-Bremse's Baa1 rating to positive

21 May 2010

Frankfurt, May 21, 2010 -- Moody's Investors Service has today affirmed the Baa1 issuer rating of Knorr-Bremse AG ("KB") and changed the outlook to positive from stable.

Rainer Neidnig, lead analyst at Moody's for Knorr-Bremse, said: "The outlook change to positive reflects the resilience of Knorr-Bremse's very solid credit metrics despite the severe recession in 2009 supported by solid market positions on a global basis. The company's recent performance also underpins the benefits of the diversification into two equally important segments as well as management's ability to adjust operations to adverse market conditions."

Although Moody's recognizes that the liquidity profile of the company is solid for the next 12 months with new confirmed medium term credit lines established over the last year, the agency notes that these back-up liquidity arrangements of Knorr-Bremse are moderately sized and maturing progressively in the next 12 to 24 months, which provides relatively modest medium to long term funding arrangements for a company with a high investment grade rating. An upgrade to A3 over the next 12 to 18 months is nonetheless possible should (i) the expected earnings recovery materialize and (ii) Knorr-Bremse maintain at least 2009 credit metrics and the current level of medium-term credit facilities.

In 2009, KB group sales amounted to EUR 2,761 million, down -18% from 2008. Hereby, the performance of KB's two divisions differed widely. The Rail Vehicle Systems division performed solidly despite the recessionary environment and recorded a revenue increase of 9% to EUR 1,553 million driven by solid growth in Asia. However, the Commercial Vehicle Systems division was severely impacted by the economic downturn and sales fell steeply to EUR 1,222 million (-38%) as a result of significantly lower demand for trucks in Europe and North America. The earnings development of the two divisions showed a very similar pattern and taking into account Moody's standard adjustments group EBITDA decreased to EUR 298 million in 2009 from EUR 447 million in 2008. As the full year benefit of the cost reduction measures implemented in 2009 will be reflected in 2010 accounts and given that the commercial vehicle market has started to stabilize we expect a notable earnings recovery for 2010 and a return to historic profit margins in the near term.

We further note positively that KB managed to reduce net debt to EUR 328 million from EUR 439 million in 2008 (including Moody's standard adjustments for pensions, operating leases and other debt-like obligations) despite the challenging environment. This reduction was possible due to KB's ability to reduce costs, limit capital expenditures and release working capital which allowed for a solid positive Free Cash Flow. As a result Debt/EBITDA as adjusted by Moody's increased only moderately to 1.6x in 2009 from 1.1x in 2008 which is still a very solid ratio.

Moody's further notes that KB has entered into certain medium credit facilities with a maturity of 2-3 years. However, most credit arrangements remain short-term. While we expect KB's current liquidity cushion to be sufficient to meet the next 12 months needs for cash arising from debt maturities, capital expenditures, working capital, day-to-day needs and dividend payments in a stress case scenario where access to capital markets and bank credit is not available, Moody's views the back-up liquidity arrangements as no better than moderate for a highly rated investment grade rating.

The principal methodology used in rating Knorr-Bremse was the Global Auto Supplier Industry Methodology, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Moody's last rating action on Knorr-Bremse was an affirmation of the Baa1 Issuer Rating and outlook change to stable from positive on 14 May 2009.

Knorr-Bremse, headquartered in Munich, Germany is the world leading supplier of brake systems to the truck and railway industry. In 2009, the company generated revenues of EUR 2.8 billion of which 44% were generated by the Commercial Vehicle Systems division and 56% by the Rail Vehicle Systems division. Approximately 30% of group revenues are generated in the aftermarket.

Paris
Eric de Bodard
Managing Director
Corporate Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt
Rainer Neidnig
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook on Knorr-Bremse's Baa1 rating to positive
No Related Data.
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