Rating Action: Moody’s assigns P-2 ratings to Continental AG
Global Credit Research – 10 Jul 2020
Frankfurt am Main, July 10, 2020 — Moody’s Investors Service (“Moody’s”) has today assigned short-time Prime-2 (P-2) issuer rating and commercial paper rating to Continental AG (Continental, or the group). The outlook on the ratings remains unchanged at negative.
RATINGS RATIONALE
RATIONALE FOR THE P-2 RATINGS
The Prime-2 (P-2) issuer rating and commercial paper programme rating are in line with Continental’s long-term issuer rating of Baa2 and reflect the group’s strong ability to repay its short-term debt obligations. Commercial papers under the new E1.5 billion programme are senior unsecured and rank pari passu with the group’s long-term senior unsecured debt instruments. The strong ability of Continental to repay short-term debt obligations is supported by the group’s E4.0 billion revolving credit facility (RCF), which includes a E1.0 billion swingline commitment and matures in December 2024. The RCF does not have financial covenants.
Moody’s considers Continental AG’s liquidity position to be good. The group’s main sources of liquidity include a sizable cash balance of approximately E2.3 billion as of the end of March 2020 (excluding around E0.2 billion in restricted cash) and annual funds from operations of around E4 billion. Externally, Continental benefits from the largely undrawn revolving credit facility of E4 billion; E3.635 billion were available at the end of March. This facility matures in December 2024. In addition, Continental and its subsidiaries issued E1.5 billion new notes in May (E750 million due 2023 and E750 million due 2026) and another E625 million in June (due 2024). Total cash sources amount to around E12 billion for the 12 months ended March 2020. In addition, the company has signed a E3.0 billion RCF in May 2020, with 364 days maturity.
Expected liquidity usage amounts to slightly above E9 billion for the same period. It includes working cash (estimated at E1.3 billion), minor working capital releases, capital spending (ca. E3 billion, including lease payments) and proposed dividend payments (E0.6 billion), as well as sizable short-term maturities of E3.6 billion. We believe Continental’s refinancing risk is manageable for the group, given its overall strong credit quality.
RATIONALE FOR NEGATIVE OUTLOOK
Moody’s outlook on all of Continental’s ratings is negative and reflects (i) risks related to the high cyclicality of the automotive industry, (ii) material short-term challenges regarding a global outbreak of the coronavirus and its risks on production, stability of supply chains and consumer demand for vehicles, and (iii) ongoing challenges in the automotive industry, such as electrification and disruptive technologies, which require ongoing high amounts of R&D spending and limit free cash flow generation. In this environment, it might be difficult for Continental to (i) maintain its debt/EBITDA (Moody’s adjusted) at a maximum of 2.5x, which is expected the Baa2 rating, (ii) improve EBITA margins (Moody’s adjusted) to at least 8% over the next 2-3 years, given the challenging sector environment and despite efficiency measures.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody’s might consider downgrading Continental’s ratings in case of (1) an increase in leverage (debt/EBITDA) to above 2.5x for a prolonged period (2.5x as of LTM March 2020); (2) the RCF/net debt coverage ratio falling below 30% (34% as of LTM March 2020); (3) a failure to recover adjusted EBITA margin to at least 8% on a sustainable basis (as of LTM March 2020: 5,1%); or (4) a deterioration in Continental’s liquidity profile.
The ratings could be upgraded if Continental was able to (1) demonstrate a sustainable Moody’s-adjusted free cash flow generation in excess of EUR1 billion per annum, that would be applied to (2) a further debt reduction leading to a decline in Moody’s leverage (debt/EBITDA) of constantly below 2.0x; (3) achieve an EBITA margin (as defined by Moody’s) sustainably above 10%; and (4) an RCF/net debt above 45%.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Automotive Supplier Methodology published in January 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1170606. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
COMPANY PROFILE
Headquartered in Hannover, Germany, Continental AG (Continental) 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 2019, Continental generated consolidated sales of over E44 billion. The company’s largest shareholder is IHO Beteiligungs GmbH, which holds a 10% direct stake and an additional 36% through its wholly owned subsidiary IHO Verwaltungs GmbH (Ba2 negative).
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain 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.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
These rating is solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Matthias Heck, CFA VP - Senior Credit Officer Corporate Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Anke Rindermann Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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