(The following statement was released by the rating agency) FRANKFURT/LONDON, July 15 (Fitch) Fitch Ratings has upgraded Continental AG's (Continental) Long-term Issuer Default Rating (IDR) to 'BBB' from 'BB' and Short-term IDR to 'F3' from 'B'. The rating of the senior secured notes issued by Conti-Gummi Finance BV has also been upgraded to 'BBB' from 'BB'. The Outlook is Stable. KEY RATING DRIVERS Standalone Rating The upgrade reflects Fitch's assessment of the parent subsidiary linkage between the Schaeffler Group and Continental AG. Fitch now deems the linkage weak enough to rate Continental on a standalone basis. The linkage has been weakened by Schaeffler reducing its stake to 49.9%, Continental extending its bank debt agreement with tight ring-fencing of cash flows to 2018 and Continental's independent dividend distribution policy. A strengthening of the linkage is considered unlikely and treated as event risk. Strong Business Profile Continental's ratings reflect its large manufacturing operations, global footprint, top ranking positions in the markets in which it operates, solid end-market diversification with about 30% of sales in the less volatile replacements business and strong R&D capability. Sound Profitability The company's financial profile is strong and relatively resilient against the cyclicality and volatility experienced in the automotive supply industry. Fitch expects EBITDAR margins of 15% for 2013 and after. The profitability is also supported by Continental's tyre business which accounted for 40.5% of 2012 sales and resulted in an EBITDAR margin of about 19%. Strong Free Cash Flow The Stable Outlook reflects Fitch's expectations for Continental's solid underlying funds from operations (FFO) margin to be remain at approximately 10% in the next couple of years. This would be sufficient to cover the high 6% capex to revenue outlays and the company's conservative dividend policy. Fitch expects the free cash flow (FCF) margin to remain in the range of 2.5%-3.5% in 2013 and after. Leverage Decreasing The Stable Outlook is further supported by Fitch's expectations that Continental's FFO adjusted leverage will decrease to well under 2.0x during 2014 from 2.3x at end-2012 and from a peak of over 6.0x at end-2007. Strong Liquidity Fitch estimates that cash and undrawn committed credit facilities amounted to around EUR4.2bn at end-June 2013. Fitch expects FCF of at least EUR1bn in 2014 and after. Given this liquidity generating ability, Continental opted for early redemption in July 2013 of two bonds amounting to EUR1.75bn with coupons of 7.5% and 8.5% and the new issuance of a EUR750m bond with a 3% coupon. Raw Materials Exposure Raw materials (RM) constitute a major part of Continental's cost structure and the historical high volatility of their prices has been a significant driver of the group's profitability. Continental does not actively hedge against the risk by using derivative instruments but intends to compensate for or pass on its increased costs to customers. A portion of this cost is typically hedged and covered by RM clauses, but these clauses and hedges only protect for a limited period of time. Continental currently benefits from significantly reduced RM prices and continuing demand especially in the replacement tyre business driving the high profitability performance. RATING SENSITIVITIES Strong FCF Margins A positive rating action may occur if, on a sustained basis, EBITDAR margins increase to above 15%, FCF margins improve to 3.0% and FFO adjusted leverage falls well below 1.5x. Fitch believes that given the independent dividend policy and some discretionary capex outlays currently, Continental has sufficient headroom to achieve these guidelines within two years. Increasing Leverage An increase in FFO adjusted leverage to above 2.0x or FCF margins falling to or below 1% to 2% may result in a negative rating action. Schaeffler Linkage Any change in Schaeffler's influence on Continental resulting in a weakening of Continental's credit profile could lead to a reassessment of Fitch's standalone approach to Continental's rating. This may also occur in case of a merger of Continental AG with Schaeffler Group, if this combination led to a deterioration of the consolidated financial profile. Contact: Principal Analyst Eric Vogeler Associate Director +49 69 76 80 76 243 Supervisory Analyst Emmanuel Bulle Senior Director +34 93 323 8411 Fitch Ratings Espana S.A.U. 85 Paseo de Gracia 08008 Barcelona Committee Chair Richard Hunter Managing Director +44 20 3530 1102 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: [email protected]. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, is available at www.fitchratings.com. 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