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Rating Action:

Moody's downgrades Voith to Ba1; stable outlook

07 Sep 2015

Frankfurt am Main, September 07, 2015 -- Moody's Investors Service has today downgraded Voith GmbH's ("Voith") senior unsecured notes to Ba1 from Baa3. Concurrently, Moody's has today assigned a Ba1 Corporate Family Rating and a Ba1-PD Probability of Default Rating to Voith. The outlook on all the ratings is stable. Today's rating action concludes the review for possible downgrade of Voith's ratings that Moody's initiated on 5 June 2015.

RATINGS RATIONALE

"We have downgraded Voith to Ba1, because of the company's weakening capital structure and cash flow generation, which is predominantly driven by weak operations in its Paper division that is currently being restructured", says Martin Fujerik, Moody's lead analyst for Voith. For the 12 month to March 2015 period, Voith's Moody's-adjusted debt/EBITDA stood at 7.2x, its Moody's-adjusted EBITA margin at 2.3% and its Moody's-adjusted retained cash flow/net debt at 9.7%. Even after taking into account material restructuring costs of around EUR140 million booked in personnel costs in the first half of the 2014-15 fiscal year ending 30 September 2015 (FY2014-15), its adjusted debt/EBITDA ratio of around 5x exceeds the trigger we set for a downgrade.

The major contributor to a heightened leverage is Voith's Paper division (27% of group revenues in FY2013-14, and historically one of the strongest profit contributors), which is facing structural changes in some of its end markets. Demand from the graphic grade paper machines has fallen dramatically in the last couple of years as digital media devices are increasingly replacing printed newspapers, magazines and books; a trend, which is unlikely to reverse. Voith's management has taken measures to adjust production capacities and to strengthen its position in the Asian mid-market segment, with focus shifting towards boards, packaging and tissue products with stronger underlying growth, but also with more competition from Chinese players.

After three years of restructuring totalling some EUR160 million in the division until FY2013-14, the Paper division is showing the first signs of stabilization, albeit at a very low level (profit from operations margin, as defined and reported by Voith, at around 2%). Another EUR110 million has been provided for in the H1 FY2014-15 in the division and a further reduction of headcount of 900 employees is envisaged, which will lead to more restructuring.

The rating agency cautions that these charges are yet to be paid, which is likely to lead to negative free cash flow generation in the next 12-18 months. The visibility for successful turnaround still remains low and Moody's believes it will take longer than 12-18 months until the business sustainably returns to a meaningful profitability without further restructuring needs, which is key for deleveraging.

The elevated leverage is also partially owing to a significant working capital increase that resulted in cash outflows of more than EUR200 million in the H1 FY2014-15, which was financed by a drawdown of bilateral credit facilities. The working capital build up was partially triggered by lower advance payments, given that the order intake in Voith Hydro, which usually benefits from initial advance payments, declined by around 50% year-on-year.

However, Moody's believes that such a decline is not the start of a longer-term trend and Voith will be able to partially improve order intake in the next 12-18 months, thereby reversing the negative working capital movement, even though the overall activity in the hydro market is likely to remain subdued.

Despite the increase in short-term debt, Moody's views Voith's liquidity as good, benefitting, among other lines, from an undrawn revolving credit facility of EUR770 million, which is without covenants and repeating material adverse change clause. Voith also benefits from sizable alternative liquidity sources, some of which may be monetized to restore the capital structure towards the levels prior the acquisition of its 25% stake in KUKA AG (Ba2 positive) for around EUR500 million in December 2014. Voith has already announced a sale of its Industrial Services division that could raise proceeds of up to EUR500 million in the next 12-18 months according to Moody's estimates, which the rating agency incorporated into the rating decision. However, Moody's believes that the investment in KUKA is of strategic nature and Voith will try to retain its stake.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that over the next 12-18 months Voith's credit metrics will substantially improve towards Moody's-adjusted debt/EBITDA of 4x and RCF/net debt in high-teens in percentage terms, which is in line with a Ba1 rating.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's could upgrade Voith to investment grade, if its Paper business returns to a meaningful profitability without requiring further restructuring, which would translate to a group Moody's-adjusted EBITA margin in the high single digits, Moody's-adjusted debt/EBITDA below 3.5x and Moody's adjusted RCF/net debt above 20%. An upgrade would also require a return to sustainable positive free cash flow generation.

Moody's could downgrade Voith's ratings, if its Moody's-adjusted debt/EBITDA stays sustainably above 4.5x, Moody's-adjusted RCF/net debt well below 20%, free cash flow remains negative for a prolonged period of time or if its liquidity profile deteriorates.

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings was Global Manufacturing Companies published in July 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Voith GmbH is a diversified mechanical engineering group organised into four divisions: Voith Paper, Voith Turbo, Voith Hydro (a 65/35 joint-venture with Siemens Aktiengesellschaft, (A1 stable) and Voith Industrial Services. Voith employed some 39,000 people in more than 50 countries and generated EUR5.3 billion in FY2013-14. The group is privately owned by descendants of the Voith family, but has been led by non-family senior managers for decades

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Martin Fujerik
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Voith to Ba1; stable outlook
No Related Data.
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