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Rating Action:

Moody's upgrades Continental AG to Ba2; positive outlook

28 Sep 2012

Approximately EUR4.0 billion of rated debt affected

Frankfurt am Main, September 28, 2012 -- Moody's Investors Service has today upgraded the corporate family rating and probability of default rating of Continental AG ("Conti") to Ba2 from Ba3. Concurrently, Moody's has upgraded the senior secured notes issued by Conti Gummi Finance B.V. to Ba2, with a loss given default (LGD) assessment of LGD4 51%, from Ba3, and the senior secured notes issued by Continental Rubber of America, Corp. to Ba2, LGD4 51%, from Ba3. In addition, Moody's has changed the outlook on all ratings to positive from stable.

Upgrades:

..Issuer: Conti-Gummi Finance BV

....Senior Secured Regular Bond/Debenture, Upgraded to Ba2 from Ba3

..Issuer: Continental AG

.... Probability of Default Rating, Upgraded to Ba2 from Ba3

.... Corporate Family Rating, Upgraded to Ba2 from Ba3

..Issuer: Continental Rubber of America Corporation

....Senior Secured Regular Bond/Debenture, Upgraded to Ba2 from Ba3

Outlook Actions:

..Issuer: Conti-Gummi Finance BV

....Outlook, Changed To Positive From Stable

..Issuer: Continental AG

....Outlook, Changed To Positive From Stable

..Issuer: Continental Rubber of America Corporation

....Outlook, Changed To Positive From Stable

RATINGS RATIONALE

"The rating action reflects the one notch upgrade of Schaeffler AG to a B1 corporate family rating, Conti's major shareholder with a 49.9% stake in the company, " says Falk Frey, a Moody's Senior Vice President and lead analyst for Conti. The upgrade of Conti's ratings also take into account the continued improvement of Conti's financial metrics during the course of this year," Frey added.

Moody's acknowledges that Continental's current leverage, measured as debt/EBITDA, of 2.4x and profitability, with EBIT margins of 9.1% for the last twelve months ended 30 June 2012, would indicate a higher rating than the current Ba2. However, the rating is held back by the uncertainty associated with the possible form and pace of a potential combination of Continental AG and its major shareholder Schaeffler, which reportedly has a high debt level following its investment in Conti.

Moody's currently considers that the risk to noteholders is mitigated primarily by financial covenants in the bond and loan documentation that restrict (1) dispose of the rubber group, or (2) merge with entities of the Schaeffler group, unless certain interest coverage and leverage tests are met with regard to metrics pro-forma for the respective transactions as well as (3) a restriction on the total dividend payout.

In addition, the further reduction of Schaeffler's stakeholding in Conti from 60% to 49.9% by disposal of the indirect stakes held via two banks has further improved Schaeffler's credit profile and indicates that a potential combination with Conti has become more distant. Nonetheless, Moody's does not anticipate a change in Schaeffler's position to impact Conti's dividend payout and thus debt repayment capacity.

The change of outlook to positive reflects Moody's expectation that (1) Conti will continue to generate positive free cash flow in the coming years and apply this to debt reduction; and (2) there will be further, sustainable improvements in the group's operating performance and cash flow generation mainly as a result of a material turnaround in the powertrain division. Moody's expects that, overall, this will lead to further improvements in the group's leverage ratio.

WHAT COULD CHANGE THE RATING UP/DOWN

Conti's ratings could be upgraded over the next 12-18 months should (1) Conti be able to further reduce its leverage, exemplified by Debt/EBITDA as adjusted by Moody's below 2.0x in the current financial year; (2) substantial free cash flow generation materialise in the current year; (3) interest coverage to remain above 3.5x in the current fiscal year. Absent any re-leverage resulting from a combination with Schaeffler these metrics could result in a further rating upgrade.

A downgrade of Conti's ratings could be envisaged should operating performance and leverage deteriorate materially below 2010 levels exemplified by (1) Debt / EBITDA as adjusted by Moody's approaching 4.0x; (ii) a free cash flow generation below EUR200 million; (3) a decline in the reported adjusted EBIT margin below 7% as well as in case of any re-leverage resulting from a combination with Schaeffler.

LIQUIDITY

As of 30 June 2012, Conti's liquidity needs for the next 12 months resulting from debt maturities as well as cash outflows for capital expenditure, working capital and day-to-day needs were covered by the group's sizable amount of cash (around EUR1.4 billion as of 30 June 2012), bilateral committed credit lines and its revolving credit facility, which has conditionality language and covenants with sufficient headroom.

At the same time, Moody's notes that Conti has a sizeable debt maturity in the form of a term loan amounting of EUR2.1 billion, and that the group has a commitment of EUR2.5 billion in 2014 under the revolving credit facility. The current rating incorporates Moody's expectation that these will be refinanced well in advance before they fall due. The recent bond issuance is a first step towards this target as Conti used the proceeds to repay part of its debt outstanding under its syndicated facility agreement dated 22 August 2007.

STRUCTURAL CONSIDERATIONS

Moody's ranks Conti's indebtedness, which is secured by bank guarantees, such as a EUR300 million loan provided by the European Investment Bank, at the top of the debt waterfall ahead of all other creditors. The EUR3.0 billion worth of notes issued by Conti-Gummi Finance B.V., the $950 million of notes issued by Continental Rubber of America, Corp. and the debt outstanding under Conti's syndicated facility agreement -- all of which benefit from upstream guarantees and are secured by share pledges, intercompany loans and cash pool accounts -- rank in line with all unsecured creditors, trade debtors, pension obligations as well as lease rejection claims at the lower end of the debt waterfall.

PRINCIPAL METHODOLOGY

The principal methodology used in rating Continental AG, Conti-Gummi Finance BV and Continental Rubber of America Corporation was the Global Automotive Supplier Industry Methodology published in January 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Hanover, Germany, Continental AG 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 2011, Continental generated consolidated sales of approx. EUR30.5 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

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

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Falk Frey
Senior Vice President
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
Managing Director
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 upgrades Continental AG to Ba2; positive outlook
No Related Data.
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