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Rating Action:

Moody's upgrades Continental's rating to Ba3; stable outlook

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 ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating 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.

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

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning 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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