(The following statement was released by the rating agency)
Dec 21 - Fitch Ratings has affirmed ThyssenKrupp AG’s (TK) Long-term Issuer Default Rating (IDR) and senior unsecured rating at ‘BBB-'. The Outlook is Negative. The Short-term IDR has been affirmed at F3.
The affirmation reflects Fitch’s view that TK will be successful in selling its two American steel assets (Steel Americas) by the end of 2013 for a combined value of at least USD3bn with proceeds retained for debt reduction. If the sales process is materially delayed or the group is ultimately unable to sell the assets, a downgrade of the ratings would be likely. This possibility is reflected in the Negative Outlook.
-Steel Americas Sale Credit-Positive
A disposal of Steel Americas would be positive for the ratings, with reduced or removed exposure to currently cash draining assets. Although the total amount expected to be received is below that originally anticipated, the potential cash consideration received and debt disposed will bring TK’s financial metrics in line with those expected of an investment grade company, and will likely outweigh the group’s decreased diversification.
-Weakened Credit Profile
TK’s Negative Outlook reflects the material deterioration in credit metrics and the uncertainty regarding the execution of a potential sale of Steel Americas. With FFO adjusted leverage at 5.8x for the year ending September 2012 (FY12), a downgrade would be expected if asset sales and debt reduction do not progress as currently expected. If disposals occur, Fitch expects FFO adjusted leverage to fall to around 3x, with anticipated positive free cash flow further reducing leverage in 2014 and 2015.
-Challenging Market in 2013
For 2013, the agency expects market conditions to remain difficult in TK’s key western European flat carbon steel markets, with demand uncertainty causing end users to only purchase stocks for which they have order visibility. Fitch expects limited margin improvement for TK’s capital goods businesses (Technologies division), including elevators, in 2013.
-Diversified Business Profile
TK’s ratings continue to reflect its well-diversified business profile, compared with many focused steel competitors. As an industrial conglomerate, the group benefits from the stability of its capital goods businesses and broad geographical diversification. It also holds strong market positions in a range of businesses, including high-quality flat carbon steel, elevators and selected engineering and service activities.
-Portfolio Optimisation Positive
TK started credit-enhancing disposal and cost-cutting programmes in May 2011. Of the assets tagged for disposal (excluding Steel Americas) in an effort to exit a quarter of businesses by revenue to reduce volatility and financial debt all have now been fully signed or closed.
Recent board changes and news flow regarding TK’s involvement in a rail cartel in Germany have highlighted corporate governance and culture issues at the company. Fitch believes that current senior management is committed to improving corporate governance and introducing a culture of greater accountability.
Positive: Future developments that could lead to positive rating actions include:
-An EBITDA margin above 7% and a return to positive free cash flow generation would support the ‘BBB-’ rating. The agency believes that the successful sale of the American assets would facilitate achievement of these metrics in 2014
Negative: Future developments that could lead to negative rating action include:
-A downgrade would likely result if the group experienced a delay (or inability) to sell its Steel Americas’ assets resulting in FFO interest cover below 4x and FFO adjusted leverage above 2.5x on a sustained basis.
TK’s excellent liquidity profile continues to be a key supporting factor for its credit profile. The group’s liquidity amounted to EUR6.7bn at September 2012, including cash and equivalents of EUR2.3bn, compared to EUR3.9bn of debt maturities until the end of FY14.