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Rating Action:

Moody's changes outlook on Schaeffler's ratings to positive; affirms Ba1 CFR

17 Aug 2021

Frankfurt am Main, August 17, 2021 -- Moody's Investors Service ("Moody's") has today changed to positive from stable the outlook on all ratings of Schaeffler AG ("SAG" or "the group"). Concurrently, Moody's affirmed the group's Ba1 corporate family rating (CFR), Ba1-PD probability of default rating (PDR), its Ba1 senior unsecured rating and the rating on its senior unsecured MTN programme at (P)Ba1.

"The outlook change to positive recognizes the faster than anticipated recovery of SAG's operating performance and credit metrics since the coronavirus outbreak last year and its strong results for the first half of 2021", says Goetz Grossmann, a Moody's Vice President and lead analyst for SAG. "The positive outlook indicates a likely upgrade of SAG over the next 12-18 months should its credit metrics continue to improve, as we expect, to levels in line with our specified ranges for an investment grade rating and its liquidity remain very strong on a sustainable basis," Mr. Grossmann continues. "While we note some headwinds from rising raw material prices, we expect SAG's profitability to be sustained at higher levels than before the pandemic, thanks to a continued automotive market recovery and recently intensified restructuring initiatives."

RATINGS RATIONALE

Today's change in SAG's outlook to positive from stable follows the group's robust results for the second quarter of 2021 (Q2 2021), with a considerable 51% increase in revenues and its reported EBIT before special items rising to €319 million (9.2% margin) from negative €159 million in Q2 2021, which marked the trough of the pandemic. That said, the rating action recognizes SAG's ability to swiftly recover since then, as shown by noticeable improvements in its profitability and consistent positive free cash flow generation, which Moody's expects to continue and to support further de-leveraging over the next 12-18 months.

As of 30 June 2021, SAG's reported net debt amounted to €2.2 billion, almost €0.8 billion lower than a year earlier, and its reported net leverage reached 0.9x, which is well below its 1.2x-1.7x target range and reflects its prudent financial policy, in Moody's view. Nevertheless, SAG's credit metrics on a Moody's-adjusted basis and profitability levels still need to improve for a higher rating. For the 12 months ended 30 June 2021, SAG's Moody's-adjusted EBITA margin of 5.9% (10.4% before restructuring costs) remained burdened by €637 million restructuring costs incurred in H2 2020 and below the rating agency's 10% guidance for a Baa3 rating. At the same time, the semi-conductor shortage continues to constrain the recovery in vehicle production, while higher freight and raw material costs (e.g. steel prices) will likely also pressure SAG's margins in H2 2021. Improving profitability sustainably to levels in line with a higher rating, therefore, remains a key challenge for SAG.

Moody's recognizes the group's diversification through the Automotive Aftermarket and Industrial divisions, where its performance was less impacted by the pandemic and which continue to perform strongly and will help mitigate the expected margin pressure in the Automotive Technologies division in H2 2021. Over 2022, Moody's expects global light vehicle sales to climb by 6% and the semi-conductor shortage and raw material cost inflation to ease, which, together with efficiency improvements from implemented restructuring, should support a further recovery of SAG's operating performance, topline and earnings growth.

In terms of cash generation, Moody's positively notes SAG's ability to maintain strong positive free cash flow (FCF) in 2020 (€314 million Moody's-adjusted) and its recently improved guidance of more than €400 million of reported FCF before M&A for 2021 (from over €300 million previously), despite expected restructuring cash outflows of more than €300 million this year. However, Moody's notes that adjusted FCF in 2021 will be supported by still below normal levels of capital spending (around 5% of group sales expected versus 7.7% on average over the last five years) and lower dividend payouts. Although restructuring cash needs will sum to a similar amount next year and capital spending and dividends likely increase, Moody's forecasts Schaeffler's FCF to remain positive also in 2022.

Moody's expects SAG's adjusted gross leverage to reduce to 3x debt/EBITDA or lower by year-end 2022, just in line with the 3x maximum guidance for a Baa3 rating, assuming the redemption of its outstanding €545 million bond due March 2022 with available cash. At the same time, considering its sizeable cash balance even after the expected bond redemption, the positive outlook also takes into account SAG's much lower adjusted net leverage, which Moody's forecasts to decline to 2.4x in 2022, back to around the pre-crisis levels in 2017 (2.2x) and 2018 (2.5x). Albeit opportunistic acquisitions in defined growth areas, which are a key element of SAG's strategy, could slow down the de-leveraging, Moody's would expect the group to prudently fund such acquisitions without compromising its credit metrics staying outside of the defined ranges for an investment grade rating for a prolonged period of time.

LIQUIDITY

SAG's liquidity is very strong. As of 30 June 2021, the group had €1.6 billion of unrestricted cash and cash equivalents, and almost €1.8 billion available under its revolving credit facility (maturing 2024), compared with its long-term debt of €7.1 billion and short-term debt of €0.6 billion (both Moody's adjusted). Furthermore, the group has access to close to €300 million bilateral credit facilities with banks, which are mostly due in September 2023.

Moody's expects Schaeffler to generate operating cash flow of about €1.4 billion over the next 12 months, more than sufficient to cover Moody's projected capital spending of around €800 million (including lease payments) and dividend payments of up to 50% of net income. Moody's expects SAG to repay its short-term debt, which mainly consists of a €545 million bond due March 2022, with its currently ample available cash on hand.

With a company defined net leverage of 0.9x as of June-end 2021, SAG has solid capacity to its leverage covenant.

RATIONALE FOR THE POSITIVE OUTLOOK

The positive outlook mirrors upward pressure on SAG's ratings mounting as its credit metrics will further strengthen over the next 12-18 months to levels in line with Moody's expectations for a Baa3 rating, including a Moody's-adjusted EBITA margin of 9%-10%. An upgrade would further require SAG to adhere to a prudent financial policy, also when pursuing potential acquisitions, and to maintain its very good liquidity at all times.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade the ratings if SAG reduces its Moody's adjusted debt/EBITDA further sustainably below 3.0x and improves Moody's adjusted RCF/net debt to at least 20% (18% at March 2020), while recovering Moody's adjusted EBITA margin to at least 10%.

Moody's could downgrade SAG's ratings, if (1) its Moody's adjusted debt/EBITDA remains sustainably above 3.5x; (2) its Moody's adjusted EBITA margin failed to recover towards 8% on a sustainable basis; (3) its FCF turned sustainably negative; or (4) its liquidity deteriorates.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Automotive Suppliers published in May 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276105. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Herzogenaurach, Germany, Schaeffler AG (SAG) is among the leading manufacturers of roller bearings and linear products worldwide, primarily for the automotive industry. It operates under three main brands — INA, FAG and LuK. In the 12 months ended June 2021, SAG generated revenue of €14 billion and almost €1.5 billion reported EBIT before special items (10.4% margin), with around 83,900 employees. As of the end of June 2021, the founding Schaeffler family members owned 75% of the share capital and 100% of the voting rights in SAG through holding entities.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

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

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Goetz Grossmann, CFA
Vice President - Senior Analyst
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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