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I AGREE
05 Apr 2011
Approximately EUR3.0 billion of debt affected
Frankfurt am Main, April 05, 2011 -- Moody's Investors Service has today upgraded Continental AG's ("Conti")
corporate family rating (CFR) to Ba3 and instrument ratings to Ba3 with
an LGD 4, 51%. The outlook on the ratings is stable.
RATINGS RATIONALE
"Today's rating action reflects both a stronger than expected recovery
in Conti's operating performance for the fiscal year 2010 as well
as a significant improvement of Conti's liquidity profile following
the successful refinancing of its credit lines leading to a well balanced
maturity profile of its overall debt outstanding," says Falk
Frey, Senior Vice President and lead analyst at Moody's for Continental.
"Despite the solid recovery in Conti's operating performance,
Moody's considers the CFR burdened 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," adds Mr.
Frey. "At this time we see the risk to noteholders mitigated
primarily by financial covenants in the bond and loan documentation that
restrict Conti's ability to (i) dispose of the rubber group,
or (ii) 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." On a standalone basis Conti's
credit profile would be in the mid- to high "Ba-category."
In addition, the recent announcement of a successful refinancing
of Schaeffler's debt structure, including the reduction of
its stakeholding in Conti from 75% (directly and indirectly via
2 banks) to 60% might lengthen the timeframe for a combination
with Conti. Schaeffler's strong improvement in operating
performance reported for FY2010 and the expectation that this development
would be sustained going forward should also lead to an improvement of
Schaeffler's credit profile over time. Nevertheless,
Moody's would expect to re-assess the position of all lenders
if and when major corporate transactions are agreed upon.
The stable outlook incorporates the expectation that (i) Conti will continue
to generate positive free cash flows in the coming years which would be
applied to debt reduction and (ii) the operating performance and cash
flow generation will sustainably improve further mainly driven by a material
turnaround in the powertrain division. Overall this should lead
to further improvements to the leverage ratio.
Upgrades:
..Issuer: Conti-Gummi Finance BV
....Senior Secured Regular Bond/Debenture,
Upgraded to Ba3 from B1
....Senior Secured Regular Bond/Debenture,
Upgraded to Ba3 from B1
..Issuer: Continental AG
.... Probability of Default Rating,
Upgraded to Ba3 from B1
.... Corporate Family Rating, Upgraded
to Ba3 from B1
On 14 March, Conti published its 2010 annual results, with
revenues increased by 30% compared to FY2009 from EUR20.1
billion to EUR26.0 billion. Adjusted EBIT amounted to EUR2.5
billion equal to an adjusted EBIT margin of 9.7%,
exceeding Moody's expectations. Reported Free Cash Flow generated
in 2010 was EUR567 million and, in addition to the cash inflow from
the capital increase in January 2010, was used to reduce Conti's
reported net financial debt to EUR7.3 billion from EUR8.9
billion at year end 2009. For the current fiscal year Continental
expects a further increase in revenues by 10% to more than EUR28.5
billion and to sustain the adjusted EBIT margin level of 9.7%
achieved in FY2010 despite an anticipated gross impact of EUR750 million
from higher raw material prices in the current year compared to last year.
Free cash flow is expected to be around EUR500 million despite rising
capital expenditures, an increase in working capital and a remaining
EUR300 million cash outflow for the restructuring implemented in 2009.
Conti's ratings could be upgraded over the medium term should (i)
Conti be able to further reduce its leverage, exemplified by Debt/EBITDA
as adjusted by Moody's to around 2.5x (2010: 3.0x)
in the current fiscal year with visibility of a further reduction towards
2.0x in the following year; (ii) free cash flow generation
of EUR500 million as defined by Moody's materialise in the current
year; (iii) interest coverage improve to above 3.0x as well
as (iv) RCF/Net Debt exceed 25% in the current fiscal year.
Moody's would also expect an improvement in Schaeffler's overall
debt burden to contribute to a reduced combined leverage ratio.
A downgrade of Conti's ratings could be envisaged should operating
performance and leverage deteriorate materially below 2010 levels exemplified
by (i) Debt / EBITDA as adjusted by Moody's approaching 4.0x;
(ii) a free cash flow generation below EUR200 million; (iii) 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.
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 would be covered by a sizable cash position
(close to EUR1.5 billion as of 31 December 2010) and its revolving
credit facility with conditionality language and covenants with sufficient
headroom.
The principal methodologies used in this rating were Global Automotive
Supplier Industry published in January 2009, and Loss Given Default
for Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA published in June 2009.
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 2010, Continental generated
consolidated sales of approx. EUR26.0 billion.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service information, and
confidential and proprietary Moody's Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
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website for further information.
Moody's adopts all necessary measures so that the information it uses
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independent third-party sources. However, Moody's
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Please see ratings tab on the issuer/entity page on Moodys.com
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The date on which some Credit Ratings were first released goes back to
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Please see the ratings disclosure page on our website www.moodys.com
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of each rating category and the definition of default and recovery.
Frankfurt am Main
Falk Frey
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Frankfurt am Main
Matthias Hellstern
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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's rating to Ba3; stable outlook
No Related Data.
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