Frankfurt am Main, March 13, 2020 -- Moody's Investors Service, ("Moody's") has
today downgraded the issuer rating of Continental AG (Continental,
or the company) to Baa2 from Baa1. Concurrently, Moody's
downgraded the senior unsecured ratings of Continental and their subsidiaries
Conti-Gummi Finance BV and Continental Rubber of America,
Corp. (CRoA). The short-term Prime-2 (P-2)
ratings of CRoA were affirmed. The outlook on the ratings is negative.
A full list of affected ratings can be found at the end of this press
release.
RATINGS RATIONALE
The rating downgrade to Baa2 ratings reflects the further deterioration
in the operating environment for European automotive parts suppliers,
the resulting pressure on Continental's profit margins and financial metrics,
as well as the company's elevated distributions to shareholders",
says Matthias Heck, a Moody's Vice President - Senior Credit
Officer, and Lead Analyst for Continental. "The negative
outlook is driven by the current uncertainty facing the auto sector for
2020 and beyond. The spreading of Covid-19 across Europe
that has led to weaker consumer sentiment could make it challenging for
Continental to sustain leverage and cash flow metrics at levels required
for a Baa2" added Mr. Heck.
Moody's sector outlook on European Automotive parts suppliers,
published 02 March 2020, remains negative. Moody's
expects global light vehicle sales to decline by another 2.5%
in 2020, following a decline of 4.6% in 2019.
Additional risks relate to a global outbreak of the coronavirus and disruption
of economic activity beyond the first quarter of 2020. For the
sector, Moody's expects EBITA margins not to recover from
already low 2019 levels, whilst environmental regulation,
electrification and disruptive technologies (such as autonomous driving
and digitalization) represent additional challenges for the sector.
For 2020, Continental expects sales to reach €42.5 billion
to €44.5 billion, while it expects EBIT margins to erode
further to 5.5% to 6.5%. The erosion
will come in particular from the Rubber group, where margins will
decline to 10% to 11% (from 12.4% in 2019).
In the Automotive group margins will reach around 3% to 4%,
after 4.4% in 2019. In 2019, Continental has
initiated an efficiency programme to reduce gross cost by approximately
€500 million from 2023. This will, however, only
increase the group's margins by around 100 basis points while requiring
upfront costs of around €1.1 billion. This implies
that Continental's EBIT margin will remain below 8% until
after 2021 and hence position the company weakly in the Baa2 rating category.
More positively, Continental's cash generation through 2019
remained decent, with free cash flow (FCF) after dividend remaining
positive. For 2020, Continental expects a FCF (before M&A
and dividend payments) of €0.7 billion to €1.1
billion. After management's proposed dividend payment of
€800 million, this leaves FCF in a range or minus €100
million to plus €300 million, a low level considering the highly
volatile sector environment and the potential of some further, albeit
smaller, M&A transactions. Moody's considers that
Continental's shareholder distributions have become more aggressive.
During 2012-2018, dividend payouts increased gradually from
24% to 33%. Whilst this level was still balanced
and in line with the sector average, the proposed payment for 2019,
albeit somewhat lower than last year, is for a year with negative
profits and increased debt levels.
At the end of December 2019, Continental's reported debt increased
to €7.6 billion. On a Moody's adjusted basis,
including pension liabilities, gross debt amounted to approximately
€12.5 billion. This translates to a Moody's adjusted
debt/EBITDA of approximately 2.5x. For 2020, Moody's
expects Continental's leverage to remain at around this level,
due to ongoing margin pressure and despite some debt reduction due to
bond maturities. For 2021, Moody's expects leverage
to improve marginally within a range of 2.0-2.5x,
including and excluding the proposed spin-off of Vitesco Technologies.
Continental's Baa2 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 €44 billion in 2019; (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 original equipment sales; (e) excellent
positioning to mitigate the disruptive trends facing the automotive industry
and (f) relatively strong credit metrics with leverage (as measured by
Moody's adjusted debt / EBITDA) of 2.5x and retained cash flow
(RCF) / net debt of 42% as of December 2019, and the maintenance
of a good liquidity profile.
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 high shareholder
distributions, including cash dividend payments and the proposed
spin-off of Vitesco Technologies.
Environmental, social and governance (ESG) risks are relevant and
have been reflected in Continental's ratings. Some of Continental's
end products, especially in the area of powertrain (Vitesco Technologies),
are negatively impacted by stricter environmental regulation of passenger
and commercial vehicles and the trend towards electrification.
This results in lower demand and profit margins for existing products
and requires high research and development cost for new products.
Continental's governance risks are moderate. As a stock market
listed company, Continental provides good disclosure in terms of
financial and sustainability reporting. The company's financial
policy includes the maintenance of good liquidity. The company
has, however, become more aggressive in terms of shareholder
distributions. Moody's therefore considers the financial
policy to be more in line with a Baa2 rating and expects, based
on its public rating target, that the company would take measures
to defend this rating if needed.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects (i) risks related to the high cyclicality
of the automotive industry, (ii) material short-term challenges
regarding a global outbreak of the coronavirus and its risks on production,
stability of supply chains and consumer demand for vehicles, and
(iii) ongoing challenges in the automotive industry, such as electrification
and disruptive technologies, which require ongoing high amounts
of R&D spending and limit free cash flow generation. In this
environment, it might be difficult for Continental to (i) maintain
its debt/EBITDA (Moody's adjusted) at a maximum of 2.5x,
which is expected the Baa2 rating, (ii) improve EBITA margins (Moody's
adjusted) to at least 8% over the next 2-3 years,
given the challenging sector environment and despite efficiency measures.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's might consider downgrading Continental's ratings to Baa3 in case
of (1) an increase in leverage (debt/EBITDA) to above 2.5x for
a prolonged period (2.5x as of December 2019); (2) the RCF/net
debt coverage ratio falling below 30% (42% as of December
2019); (3) a failure to recover adjusted EBITA margin to at least
8% on a sustainable basis (as of December 2019: 7.4%);
or (4) a deterioration in Continental's liquidity profile.
The ratings could be upgraded if Continental was 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 2.0x; (3) achieve an EBITA margin (as
defined by Moody's) sustainably above 10%; and (4) an RCF/net
debt above 45%.
LIST OF AFFECTED RATINGS
..Issuer: Conti-Gummi Finance BV
Downgrades:
....BACKED Senior Unsecured Medium-Term
Note Program, Downgraded to (P)Baa2 from (P)Baa1
Outlook Actions:
....Outlook, Remains Negative
..Issuer: Continental AG
Downgrades:
.... LT Issuer Rating, Downgraded to
Baa2 from Baa1
....Senior Unsecured Medium-Term Note
Program; Downgraded to (P)Baa2 from (P)Baa1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa2 from Baa1
Outlook Actions:
....Outlook, Remains Negative
..Issuer: Continental Rubber of America, Corp.
Affirmations:
.... ST Issuer Rating, Affirmed P-2
....BACKED Senior Unsecured Commercial Paper,
Affirmed P-2
Downgrades:
....BACKED Senior Unsecured Medium-Term
Note Program, Downgraded to (P)Baa2 from (P)Baa1
Outlook Actions:
....Outlook, Remains Negative
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Automotive Supplier
Methodology published in January 2020. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
COMPANY PROFILE
Headquartered in Hannover, Germany, Continental AG (Continental)
is one of the top automotive suppliers worldwide in the areas of brake
systems, systems and components for powertrains and chassis,
instrumentation, infotainment solutions, vehicle electronics,
technical elastomers, as well as the world's fourth-largest
manufacturer of passenger and commercial vehicle tires. In 2019,
Continental generated consolidated sales of over €44 billion.
The company's largest shareholder is IHO Beteiligungs GmbH, which
holds a 10% direct stake and an additional 36% through its
wholly owned subsidiary IHO Verwaltungs GmbH (Ba1 negative).
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
