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Moody's revises Continental's outlook to negative from stable

Moody's on Aug. 28 revised its outlook on German automotive supplier Continental AG to negative from stable, citing the negative environment for the wider European automotive parts sector.

The rating agency said it took into account public statements of other auto-parts suppliers in Europe. Moody's said it predicts a 3.8% decline in global light vehicle sales in 2019 and another 0.9% decline in 2020.

Margins in the sector are expected to decline by 100-150 basis points in 2019, with no significant recovery in 2020, Moody's said.

The agency said the overall negative environment could put pressure on Continental's profit margins and financial metrics.

Moody's added that Continental could find it hard to recover its operating profit margins next year as a result of a potentially hard Brexit and any possible acceleration of trade conflicts such as between the U.S. and China.

Meanwhile, the agency affirmed Continental's Baa1 long-term issuer and senior unsecured ratings, as well as the (P)Baa1 debt issuance program ratings of Continental and its subsidiaries, Continental Rubber of America Corp. and Conti-Gummi Finance BV, and the Prime-2 (P-2) short-term ratings of Continental Rubber of America.

Moody's said it might consider downgrading Continental's ratings to Baa2 in case of an increase in leverage to above 2.0x for a prolonged period, if the company's retained cash flow/net debt coverage ratio falls under 40%, if its adjusted EBITA margin falls below 10%, or if Continental's liquidity profile deteriorates.

An upgrade to A3 is likely if Continental is able to generate free cash flow in excess of €1 billion annually.