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Rating Action:

Moody's confirms IHO-Verwaltungs' ratings at Ba2; outlook negative

16 Jun 2020

Frankfurt am Main, June 16, 2020 -- Moody's Investors Service, ("Moody's") has today confirmed IHO Verwaltungs GmbH's (IHO-V) corporate family rating (CFR) and senior secured instrument ratings at Ba2 and the probability of default rating (PDR) at Ba2-PD. The outlook on the ratings changed to negative from ratings under review.

This rating action concludes the review for downgrade process, which was started on 26 March 2020.

"The ratings confirmation reflects the recent recovery of share prices of IHO-V's two main investments, Continental AG and Schaeffler AG, which have improved the leverage of IHO-V back into our expected range for the Ba2. We also note the solid interest cover as both Continental and Schaeffler have decided to cut back on shareholder distributions to a limited degree only", said Matthias Heck, a Moody's Vice President -- Senior Credit Officer and Lead Analyst for IHO-V. "The negative outlook is driven by the high volatility of share prices and, more generally, the ongoing high pressure in the automotive industry, which could negatively impact profitability and dividend payments of Continental and Schaeffler.", added Mr. Heck.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The ratings confirmation reflects the improved market value-based net leverage (MVL) of approximately 39% (as of 15 June 2020), after very high levels of around 50%, when Moody's downgraded IHO-V's rating to Ba2 and placed it under review for further downgrade on March 26, 2020. With the recent recovery of the share prices of Continental AG and Schaeffler AG, IHO-V's MVL is now back within the range of 30-40%, which Moody's considers to be appropriate for the Ba2 rating. In addition, IHO-V collected approximately €220 million of dividends from Schaeffler AG in May and will collect approximately €216 million from Continental AG in July, based on the company's revised proposal published 03 June 2020. With this, the FFO/interest cover will be 2.7x, well in line with our expected range of 2.5-3.0x for the Ba2.

Moody's forecasts for the global automotive sector a 20% decline in unit sales in 2020, with a steep year-over year contraction in the first three quarters followed a modest rebound in the fourth quarter. We expect 2021 industry unit sales to rebound and grow by approximately 11%. However, future demand for vehicles could be weaker than our current estimates, the already competitive environment in the auto sector could intensify further, and Schaeffler AG and Continental AG could encounter greater headwinds than currently anticipated.

The widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The global automotive industry is one of the sectors that will be most severely impacted by the outbreak. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

IHO Verwaltungs GmbH's (IHO-V) Ba2 corporate family rating (CFR) is primarily constrained by (1) a fairly high concentration risk, with IHO-V being solely dependent on the dividends received from only two assets that are largely active in the cyclical automotive industry, Schaeffler AG and Continental AG; (2) a lack of clearly defined financial policies aimed at preserving a conservative capital structure, offsetting the fairly high concentration risk; (3) a somewhat limited, but improved, level of reporting at the IHO-V standalone level; and (4) its somewhat elevated market value-based net leverage (MVL) that is currently at around 36% and an interest cover (Funds from operations (FFO) interest cover) which strongly depends on dividend collections and might fall further in 2021.

However, the Ba2 CFR benefits from IHO-V's (1) good liquidity profile, with no major debt maturities before 2024; (2) substantial size and overall strong credit metrics on a consolidated basis; and (3) ownership of sizeable stakes in high-quality assets in Schaeffler AG and Continental AG, both being publicly listed and highly rated (Continental AG at Baa2, Schaeffler AG at Ba1).

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects the high volatility of share prices of Continental AG and Schaeffler AG, which might increase IHO-V's MVL beyond Moody's expectations for the Ba2 again. Moreover, the ongoing pressure in the automotive industry could negatively impact profitability and leverage or both companies and finally their capacity to pay dividends in 2021 for 2020, which will be a particularly challenging year.

LIQUIDITY

We view IHO-V's liquidity as good. As of the end of 2019, IHO-V had €135 million cash and cash equivalents. In addition, IHOV has access to a €400 million revolving facility, maturing in June 2024. This facility has one net leverage covenant (5.0x net debt/EBITDA, calculated on IHO's and Schaeffler AG's consolidated accounts), currently with ample headroom. The covenant headroom will decline in 2Q, as a result of the delayed payment of the Dividend of Continental AG into 3Q and the weakness in Schaeffler AG's operating performance during the production standstills in 2Q. There are no debt maturities until 2024.

In our liquidity analysis for IHO-V, we compare cash inflows (that are the dividends received from SAG and Continental AG) with cash outflows (that are costs and taxes, interest and dividends paid). For 2020, based on the dividend payment of Schaeffler AG (IHO-V share €220 million) and proposed dividends of Continental AG (IHO-V share €216 million), we expect cash inflows to comfortably cover cash outflows. For costs and taxes, we assume some €50 million, which is broadly in line with that in the previous years. The interest paid is based on the 3.8% average effective interest rate and amounts to approximately €150 million (taking into account currency hedging effects). We did not take into consideration any major dividends to be paid to IHO Beteiligungs GmbH. For 2021, we assume dividends received within the 30% - 50% net income range for SAG and dividends for Continental AG might decline compared to previous year level.

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

Moody's could downgrade IHO-V's ratings if its (1) market value-based net leverage exceeds 40% on a sustained basis (approximately 36%, based on share prices of Continental AG and Schaeffler AG on June 04 24, 2020); (2) FFO interest cover deteriorates below 2.0x (approximately 2.7x, based on proposed dividends for 2019) on a sustained basis; (3) Moody's adjusted debt/EBITDA remains above 3.0x (3.6x for 2019) sustainably and Moody's adjusted EBITA margin fails to recover to above 8% (5.8% in 2019), both based on INA-Holding Schaeffler GmbH & Co. KG statements that fully consolidate Schaeffler AG and Continental AG; or (4) liquidity deteriorates.

Given the current market situation we do not anticipate any short term positive rating pressure. An upgrade of IHO-V's ratings would require (1) a clearly formulated financial policy aimed to preserve a conservative capital structure, (2) a market value-based net leverage of 30% or less, and (3) FFO interest cover above 2.5x on a sustained basis. An upgrade would also require (4) Moody's adjusted debt/EBITDA to be sustained below 2.5x and Moody's adjusted EBITA margin to be improved to around 10%, both based on INA-Holding Schaeffler GmbH & Co. KG's financial statements that fully consolidate Schaeffler AG and Continental AG. An upgrade would also require (5) improved reporting at IHO-V level.

LIST OF AFFECTED RATINGS:

..Issuer: IHO Verwaltungs GmbH

Confirmations, Previously Placed On Review For Downgrade:

.... LT Corporate Family Rating, Confirmed at Ba2

.... Probability of Default Rating, Confirmed at Ba2-PD

....Senior Secured Regular Bond/Debenture, Confirmed at Ba2

Outlook Actions:

....Outlook, Changed To Negative From Ratings Under Review

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Automotive Supplier Methodology published in January 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1170606. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Herzogenaurach, Germany, IHO Verwaltungs GmbH (IHO-V) is a holding company that owns 75% of share capital (and 100% of voting rights) in SAG and 36% of share capital in Continental AG. Both these assets are leading automotive suppliers in Europe. IHO-V is ultimately owned through a holding structure by two members of the Schaeffler family.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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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