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Rating Action:

Moody's downgrades Voith to Baa2 -- stable outlook

19 Feb 2010

Approximately EUR750 million rated debt securities affected

Frankfurt, February 19, 2010 -- Moody's Investor's Service today downgraded Voith's senior unsecured debt ratings to Baa2 from Baa1. The outlook has been changed to stable from negative. The rating action reflects Moody's expectation that Voith will not be able to boost cash flow or reduce net debt near term to a level of cash flow leverage that is commensurate with a Baa1 rating. Voith's recent performance has shown remarkable resilience to a challenging operating environment but cost saving efforts so far have proven insufficient to guide profitability and cash flow sufficiently upwards to reach the level anticipated in the previous Baa1 rating. At a Baa2 rating, Voith is comfortably positioned with some flexibility for cyclical weakness which is reflected in a stable outlook for the rating.

So far, Voith has been quite successful to weather the challenges of the recessionary environment. Supported by a sound order intake exceeding sales of financial year 2007/08 and a 3% increase in revenues Voith has stabilized its profitability at around a 7% EBITA margin and interest coverage at 3.0x. The family owned company with its long-term oriented approach continued its strategy to apply excess cash flow to operating investments for future growth, as mirrored in a Capex to Depreciation ratio of 146%. Moody's recognizes that this strategy has consolidated its already solid global competitive position and strengthened its long-term growth potential, in particular by diversifying its business mix.

During financial year 2008/09 Voith used its access to the capital markets and raised €450 million in bonds and notes (Schuldscheine) in order to further strengthen the already solid liquidity profile. This measure, effected in the context of volatile financial markets, resulted in an elevated level of gross debt, which was only partially mitigated by a net €274 million increase in cash and marketable securities since investments in securities held as non-current assets have not been considered cash equivalents by Moody's standard adjustments.

Since retained cash flow remained stable from 2008 this increase in net debt caused a deterioration in cash flow leverage (RCF/net debt to 23% from 27%) below short term guidance of 25%. Free cash flow of EUR16 million was moderate compared to the absolute amount of debt (EUR2.39 billion as adjusted by Moody's) held back by the high level of capital expenditures of €277 million. Moody's also remains cautious on the potential to materially improve key credit metrics in the intermediate term against a 2010 economic and business environment expected to remain challenging.

The stable outlook reflects Moody's acknowledgement of Voith's successful recalibration of the business profile away from the historic strong dependency from the quite volatile paper related business -- accounting for more than 60% of sales ten years ago - to a more balanced business mix with about one third of sales generated in that area. Together with a solid order book of EUR5 billion (covering 124% of Systems and Products sales) and supported by the restructuring activities initiated during financial year 2008/09 and the balancing effect of the portfolio of different activities Voith should be able to continue on the stable performance pattern shown so far.

Rating pressure would build again, should the company be unable to defend (i) an EBITA margin level above 6.5%, (ii) retained cash flow coverage of at least 20% and (iii) a ratio of cash and marketable securities to debt above 25%. Likewise a further increase in leverage towards 3x Net debt / EBITDA would be negative to the rating.

Downgrades:

..Issuer: Voith AG

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1

Outlook Actions:

..Issuer: Voith AG

....Outlook, Changed To Stable From Negative

The last rating action for Voith was on February 19, 2009, when Moody's changed the rating outlook to negative from stable and maintained its Baa1 Senior Unsecured Rating.

The principal methodology used in rating Voith was Moody's Global Heavy Manufacturing Industry Rating Methodology, published in November 2009 and available on 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 Ratings Methodologies sub-directory on Moody's website.

Voith AG is the operative management holding company of the Voith Group of Companies, headquartered in Heidenheim, Germany, a family-owned diversified mechanical engineering concern with leading positions in paper machine technology, hydro power generation, selected niches of power transmission and technical services. Total group sales for the fiscal year ending 30 September 2009 amounted to €5.1 billion.

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
Oliver Giani
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Voith to Baa2 -- stable outlook
No Related Data.
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