The rating affirmation reflects Scope’s continued view on Franz Haniel & Cie. GmbH's (Haniel’s) consequent execution of its investment strategy with new additions from DesleeClama and Rentokil as well as the envisaged Metro demerger which provides further stability of dividends from portfolio companies and the portfolio’s NAV. The holding’s cost coverage ratios of ≥1.0x are commensurate with the investment-grade rating. The assigned S-2 short-term rating reflects Haniel’s liquidity profile.

Key rating drivers

Consistent execution of buy-and-build investment strategy. Scope positively views Haniel’s recent developments regarding the rebalancing of its investment portfolio (Belgian mattress fabrics specialist DesleeClama acquired in Q1 2016 and the continental European business activities from Rentokil Initial in the areas of hygiene, workwear and cleanroom services, which will likely be acquired by CWS-boco in Q2 2017).

In Scope’s view, these two portfolio additions enhance Haniel’s dividend diversification and robustness in three ways: First, Scope expects cost coverage to improve through the first dividend contributions in 2016 from the merged entity, BekaertDeslee, as well as through improved dividends from CWS-boco beyond 2017. Second, Scope regards these two portfolio additions as creating further dividend stability and, hence, more reliable cost coverage at holding level, because both ventures operate in a business environment with limited cyclical features and a high share of recurring business. Third, the two acquisitions pose no burden to Haniel’s indebtedness and net asset value, as these can be financed using liquid financial assets and the holding’s cash reserves.

While these acquisitions generally bear execution risks from integrating the new entities, Scope expects such risks can be mitigated largely by Haniel’s and its portfolio companies’ wide experience. Also, the additions complement the business as opposed to cannibalising it.

Metro demerger supporting further diversification and robust dividends. Haniel’s credit profile is further supported by the demerging of Metro – Haniel’s largest entity – into two stock-listed entities: i) a wholesale and food specialist group comprising the ‘cash and carry’ and hypermarket business (METRO, MAKRO, Real), and ii) a consumer electronics group, Media-Saturn. Scope considers that the demerger into two independent entities with different cyclical features strengthens the holding company’s investment portfolio by making dividend streams more diverse and robust (see also research note: Reduced asset and dividend concentration from METRO demerger). Furthermore, the public listing of the two independent companies will provide further flexibility to decrease the share of Haniel’s biggest portfolio asset.

Decreased portfolio liquidity offset by liquidity buffer. While on the one hand, Haniel’s investments in private SMEs enhance the holding’s credit quality from a dividend perspective, they, on the other hand, also decrease the portfolio’s liquidity because fewer fungible investments are available. Scope, however, keeps its view that risks from such a lack of direct portfolio liquidity are offset by the high leeway provided by Haniel’s communicated debt targets and the availability of other funding sources, if needed, such as public debt.
 
Full cost coverage to stabilise sustainably at 1.0x or more. Haniel’s BBB- issuer rating reflects Scope’s view on the full cost coverage at holding level, as measured by a total cost coverage of 1.0x or more (incl. dividends and share buybacks). Scope deems this level to be sustainable, further stabilised by: i) reduced interest burden from the repayment of the 2017 corporate bond with cash, ii) no further cost burden from the so-called ‘Kalksandstein’ payments, and iii) the first dividend contributions from the newly integrated ventures.

Comfortable headroom on loan-to-value (LTV). Despite the executed and designated investments in the new portfolio ventures, the holding’s leverage remains commensurate with the assigned investment grade rating. On the one hand, Haniel funded the DesleeClama acquisition with its cash pile and is expected to fund the CWS-boco Rentokil deal without raising new debt. LTV is forecast at around 14% at the end of 2016. On the other hand, the redemption of the EUR 247m corporate bond in February 2017 was made from internal funds. Scope’s sensitivity analysis shows that Haniel’s portfolio market value would need to decrease by 30% to surpass an LTV threshold of 20%.

Liquidity and short-term rating

S-2 short-term rating driven by strong liquidity measures and strong access to funding. Scope regards Haniel’s liquidity and financial flexibility as strong. While the buffer of cash and cash equivalents has reduced through the Deslee and Rentokil acquisitions as well as through the redemption of the 2017 corporate bond, Haniel’s short-term debt is safely covered by internal and external sources of liquidity.

In addition, Haniel can comfortably cover upcoming short-term debt maturities over the next three years through: its expected cost coverage ratios of 1.0x or more; unused credit lines of more than EUR 650m; the option for a EUR 500m commercial paper programme, and the good access to public and private debt capital markets. Haniel also has strong banking relationships, evidenced in part by the broad mix of committed long-term credit lines from different banks. It also has good standing in public debt markets. Based on these facts and Haniel’s investment grade rating, Scope has assigned a short-term rating of S-2.

Senior unsecured debt instruments

Assignment of BBB- rating for Haniel senior unsecured debt instruments, in line with the issuer rating.

Outlook

The Outlook remains Stable. The outlook reflects Scope’s expectations of a total cost coverage of 1.0x. A higher rating could be warranted if the holding’s total cost coverage were to exceed 1.3x on a sustainable basis, and if concentration risks in the portfolio were to reduce. A lower rating could result if the holding were to exceed its communicated net debt target, without offsetting this through additional dividend streams from new investee companies or the total cost coverage was expected to fall below 1.0x on a sustainable basis. 

Legal and regulatory disclosures

Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr Stefan Bund, Dr Sven Janssen.
The rating analysis has been prepared by Sebastian Zank, Lead Analyst
Responsible for approving the rating: Olaf Tölke, Committee Chair

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity. The issuer participated the rating process.
As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of information for the rating
Annual reports/semi-annual reports of the parent entity - Website of the parent entity - Detailed information provided on request - Data provided by external data providers - Interview with the parent entity - External market reports - Press reports/other public information
Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodology applicable for this rating (Corporate Rating Methodology) is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

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