S&P Global Ratings on Aug. 19 revised the outlook on auto-parts maker Schaeffler AG to negative over weakening profitability and cash flow.
The rating agency said the move reflects its view that the German company will likely not be able to recover its profitability to about 15% in 2020 and 2021 due to weaker automotive market conditions this year. For an outlook revision to stable, Schaeffler will have to strengthen its adjusted EBITDA margins in line with the historical performance of 15% to 16%.
Ratings believes it will be a challenge for Schaeffler to improve its EBITDA margins in the next 12 months to 24 months, saying this is contingent upon more favorable market conditions and good execution of management's efficiency measures.
It also noted that the company's automotive original equipment manufacturing segment is the group's most exposed business, affected by the decline in volume across China and Europe. The division contributed 62% of group sales and 30% of group EBIT in the first half of 2019.
The rating agency said that despite improved performance in the industrial business, Schaeffler's revised guidance will lower the company's S&P Global Ratings-adjusted EBITDA margins to about 13.6% in 2019 from 15.4% in 2018. The industrial business represents 25% of the company's consolidated revenue.
Schaeffler is a 75%-owned unit of IHO Verwaltungs GmbH, which is 100% indirectly owned by holding company INA-Holding Schaeffler GmbH & Co. KG.
INA-Holding Schaeffler holds a 46% stake in Germany-based tire maker and automotive supplier Continental AG, but the latter's operations are not integrated within the Schaeffler business. As such, Ratings said its assessment of Schaeffler's business risk profile does not factor in any meaningful synergies from a potential tie-up with Continental, nor any integration risk.
Meanwhile, Ratings also revised its view on the Schaefller's management and governance to satisfactory from fair, reflecting the group's willingness and capacity to reduce its indebtedness at IHO Verwaltungs.
The agency affirmed Schaeffler's BBB- long-term issuer credit rating while affirming its BBB- issue rating on the company's unsecured debt. It also affirmed the BB+ issue rating on IHO Verwaltungs' secured debt.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.
