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.
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for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
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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
