(The following statement was released by the ratings agency)
June 22 - Fitch Ratings has upgradedAG's (Continental) Long-term Issuer Default Rating (IDR) to 'BB-' from 'B+' and affirmed the Short-term IDR at 'B'. The Outlook is Stable. Fitch has also affirmed the rating of the senior secured notes issued by Conti-Gummi Finance BV at 'BB-'.
The upgrade reflects's successful refinancing of its syndicated senior debt, completed at the end of March 2011, together with a significant improvement in operational performance and profitability in fiscal year 2010 (FY10) and Q111 as anticipated by the Positive Outlook Fitch assigned in October 2010. The original syndicated bank credit facilities were reduced by EUR500m to EUR6bn, and consist of a EUR625m term loan maturing in August 2012, a EUR2,875m term loan and a EUR2,500m revolving credit facility both due in April 2014. As at year-end 2010 (FYE10), Continental's liquidity of EUR4bn comprised EUR1.47bn cash and EUR2.5bn available under committed facilities.
As a result of the refinancing exercise and deleveraging, Continental's annual cash interest expense is expected to decline and the company will benefit from a more evenly distributed debt maturity profile with similar sized instalments between 2011 and 2018. Senior bank debt facilities amount to EUR6bn, including a EUR1.4bn undrawn revolving credit facility, while senior secured notes total EUR3bn. The balance of EUR1.5bn consists of various bilateral bank credit facilities and a EUR300m European Investment Bank [EIB.UL] (EIB) loan. The company has stated that it currently has no further plans to access the capital markets in 2011.
Due to restructuring measures implemented during FY09, Continental's EBITDAR margin has also markedly improved to around 14.3% for FY10 from 11.4% in FY09. Adjusted leverage, as measured by lease-adjusted gross debt divided by operating EBITDAR, declined considerably to 2.75x in FY10 from a high of 5.2x in FY09.
The ratings also reflect's direct and indirect 60% stake in Continental after it sold a 15% stake in Continental for EUR1.8bn in March 2011. Based on its Parent-Subsidiary Rating Linkage methodology, Fitch believes that Continental's rating will continue to be constrained by Schaeffler's weaker and more leveraged credit profile. However, a combination of Schaeffler and Continental is deemed unlikely in the coming 12 to 18 months, especially after the recent 15% stake disposal. Both companies have independently stated that deleveraging is a priority in their financial strategy and Fitch believes that any combination of the two entities should only happen after financial metrics of both groups have improved. The agency will continue to monitor closely any future development and assess any announcement and its potential impact on Continental's ratings.
Further positive rating action is contingent upon Continental-'s combined free cash flow margin remaining consistently at or above 2.5% along with a conservative financial policy resulting in a combined FFO adjusted gross leverage falling below 3.0x. In this context, Fitch would also positively view an improvement in Schaeffler's standalone credit profile.
Conversely, negative rating action could result from FFO adjusted gross leverage increasing above 3.5x, the EBITDAR margin declining below 9%, or as a result of any debt-financed transaction including the potential Continental-Schaeffler combination or evidence of Schaeffler's credit profile materially deteriorating.