October 15, 2012 / 3:05 PM / in 5 years

TEXT-Fitch says positive mkt reaction to Schaeffler's Continental stake disposal

(The following statement was released by the rating agency)

Oct 15 - Fitch Ratings observes that Continental AG’s spreads and CDS have continued to tighten in the first half of October 2012 following the Schaeffler group’s decision to dispose of its 10.4% stake in Continental held in its name by two fiduciary private banks. This follows the fixed income markets’ positive reaction since Fitch’s rating action on 15 May 2012 when the agency upgraded Continental’s Long-term Issuer Default Rating (IDR) to ‘BB’ from ‘BB-', and affirmed the Short-term IDR at ‘B’. The Outlook is Stable. Schaeffler’s decision to sell the stake held by the banks is consistent with Fitch’s considerations in its May 2012 rating action. Schaeffler Holding and its subsidiary Schaeffler AG now hold a combined 49.9% of Continental, but this does not change the existing relationship between Schaeffler and Continental as Fitch already considered before the stake disposal that Schaeffler’s controlling influence and ability to extract cash from Continental was limited. Continental’s ratings continue to reflect Fitch’s assessment of Continental’s standalone credit profile being consistent with a low ‘BBB’ rating. However, the ratings also incorporate the agency’s assessment 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. Furthermore, Fitch believes that uncertainty remains about what the ‘end-game’ will be for Schaeffler/Continental and that the ring-fencing is largely dependent on negotiations between Continental and banks’ lending at both the Schaeffler and Continental level, whose interest might not be necessarily aligned with Continental’s bondholders. The Schaeffler group remains highly leveraged, in spite of the recent Continental stake disposal and further deleveraging is reliant on asset sales. Nonetheless, Fitch considers that Schaeffler’s decision to sell a stake in Continental is modestly positive in view of the EUR1.6bn proceeds from the deal applied to Schaeffler’s debt reduction. This results in a slightly stronger Schaeffler/Continental combined financial profile. Fitch calculates that the pro-forma funds from operations adjusted leverage on a consolidated basis of Schaeffler Group and Continental has declined to just above one of the agency’s positive guidelines of 3x for a possible upgrade. In addition, this move lowers the probability of a full merger or combination between Schaeffler and Continental in the future. (Caryn Trokie, New York Ratings Unit)

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