RPT-Fitch: Schaeffler-Conti Link May Be Weakening As Accord Ends

Thu May 23, 2013 5:29am EDT

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May 23 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says that Schaeffler Group's decision to end its investment agreement with Continental AG ('BB'/Stable) is another illustration that structural and financial links between the two groups are gradually weakening. We are therefore reassessing our view on the linkage strength between Continental and Schaeffler and its impact on the former's ratings. This may lead to a positive rating action and lead Continental's ratings to converge towards its standalone credit profile in the 'BBB' rating category if we assume that we will see further evidence of the linkage weakening.

Schaeffler said that it will unilaterally terminate its shareholder's agreement with Continental in May 2014, the earliest possible date included in the accord, as key provisions expired in 2012 and the agreement has no practical relevance. Nonetheless, uncertainty remains high about the future relationship between both groups. From an operational standpoint, Fitch believes that Schaeffler's decision will not have any material impact on industrial and business cooperation in the short-term.

We also believe that Schaeffler's strategy with regards to its participation in Continental remains extremely unclear despite Schaeffler's comments that Continental will remain a key long-term partner. Schaeffler's decision to end their investment agreement may mean that they intend to reduce their participation in Continental but we believe that Schaeffler may also maintain its stake at its current 49.9% level. Indeed, the investment agreement was not preventing Schaeffler from reducing its participation. Therefore, ending the accord does not constitute any trigger enabling Schaeffler to sell a stake.

Continental's ratings continue to reflect our assessment of the company's standalone credit profile being consistent with a low 'BBB' rating. However, the ratings also incorporate our view of the Schaeffler Group and Continental's consolidated credit quality, including a one-notch uplift to reflect the ring-fencing in place and creditor protection included in Continental's existing bond and loan documentation. In particular, we believe that Schaeffler's controlling influence and ability to extract cash from Continental is limited owing to a ring-fencing between the two groups.

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