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Rating action

Scope Ratings affirms its issuer ratings of BBB-/Stable/S-2 on Germany-based Franz Haniel & Cie. GmbH and its financing subsidiary Haniel Finance GmbH. Senior unsecured debt is affirmed at BBB-.

Rating rationale

Portfolio reshuffling – focus on integration and divestment

Despite existing investment headroom, Haniel has not added new portfolio companies between H2 2018 and 2019 YTD. Scope believes this is due to the fierce competition for attractive targets that match Haniel’s investment criteria and comparatively high valuation levels. Nevertheless, the holding company continues to reshape its portfolio in line with its investment strategy, i.e. to focus on controlling stakes in mature European SMEs. As a first step, Haniel has reduced its non-controlling exposure to METRO AG, selling 7.3% to EP Global Commerce GmbH (EPGC), a Czech-Slovakian acquisition entity backed by two high-net-worth individuals, Patrik Tkác and Daniel Kretínský. The remaining 15.2% can be sold by the end of June 2019 if EPGC decided to exercise a call option granted by Haniel. Secondly, Haniel has strongly focused on developing the entities it controls. This includes the further development of CWS-boco, its integration of the acquired parts of Rentokil Initial (most of continental European workwear and hygiene), as well as the support of a new financial setup at BekaertDeslee.

The success of these efforts was most evident in the strong income growth from CWS-boco including contributions from the Rentokil Initial joint venture, just one year after its formation.

METRO divestment bears chances but also risks

The exercise of the call option for METRO is likely to depend on i) the ongoing corporate restructuring at METRO such as the envisaged disposal of Real’s operational business and attached real estate assets; and ii) the execution of EPGC’s call option to buy 5.4% in METRO from CECONOMY AG. From Scope’s perspective, the impacts on the future robustness of Haniel’s income streams are twofold.

1. Investment headroom and alignment to investment strategy improves further. Although an exit from METRO would reduce portfolio liquidity and fungibility, the sale proceeds would provide further headroom to acquire controlling stakes in mature European SMEs. For example, we believe the full METRO proceeds are enough to acquire 2-3 new ventures which meet the investment criteria, and this is on top of the existing investment headroom at the end of 2018. However, building such a portfolio requires time, as demonstrated by the scarcity of suitable investments over the last year.
    
2. Asset and dividend concentration risks persist, particularly if the METRO call option is exercised. Concentration risks in the portfolio’s market value and dividend profile are likely to increase again if EPGC exercised its call option for the remaining METRO stake and Haniel cannot source suitable portfolio substitutes during 2019/20. This is because the concentration towards CWS-boco will increase to over half of Haniel’s portfolio value of portfolio companies and income streams. While one could argue that the CWS-boco exposure relates to two different ventures, i.e. workwear and hygiene (a similar situation as with METRO prior to its demerger), the profit-and-loss transfer agreements relates to CWS-boco as a whole.

Low market value gearing comfortably below 25% 

Haniel’s indebtedness, as measured by a low loan-to-value ratio of 14% at YE 2018, remains very comfortable. This is despite the strong reduction in portfolio market value (EUR 4.6bn at YE 2018 from EUR 6.8bn at YE 2017) owing to share price declines for METRO, CECONOMY and TAKKT as well as the reduced METRO holding. The loan-to-value ratio remains strongly exposed to market volatility via fluctuating share prices. However, leverage is not expected to deteriorate over the next three years due to the low remaining Scope-adjusted debt of EUR 0.6bn and our outlook for no external debt financing – unless Haniel makes acquisitions using credit lines, its commercial paper programme or a new bond issue. According to Scope’s sensitivity analysis, portfolio market value needs to decrease by more than 40% before a 25% loan-to-value ratio is reached.

Even more financial headroom for acquisitions

Haniel’s investment potential has risen to EUR 1.4bn at YE 2018. This incorporates the maintained net debt ceiling of EUR 1bn and current net economic debt of negative EUR 400m (comprising net financial debt of EUR 0.6bn and financial assets of EUR 1bn). Such headroom provides a good buffer if total costs cannot be covered fully although deemed unlikely over the next few years, but if unused would lead to negative cost of carry in view of the currently low interest rates.

Total cost coverage affected by METRO-related uncertainties

Total cost coverage in 2018 at 1.8x (1.5x in 2017) continues to be comfortably above Scope’s 1.3x threshold for a positive rating action, strongly bolstered by good results from CWS-boco and the first post-demerger dividends from METRO and CECONOMY. In 2019, Scope expects the ratio to again exceed this threshold at 1.4x for the third time in a row. The calculation incorporates EUR 38m of dividends from METRO (February), no dividend payments from CECONOMY (February), and EUR 28m of dividends and special dividends from TAKKT (May) as well as our expectations about robust cash flow contributions from the remaining portfolio companies. If EPGC exercised its call option on METRO by the end of June 2019, Haniel would need to compensate for the resulting loss in dividends. This could include the resumption of CECONOMY’s dividend or the addition of new ventures which immediately pay dividends or transfer their profits to the holding. However, as visibility on these future income streams is limited, Scope expects total cost coverage to return to 1.0x-1.3x, commensurate with the current BBB-/Stable issuer rating. Nevertheless, the ratio could be maintained at 1.3x or higher if Haniel reinvested its financial headroom in the short term or retained its current METRO stake beyond June 2019.

Robust liquidity

Following the redemption of the EUR 200m corporate bond in February 2019, Haniel’s debt burden comprises the remaining portion of the EUR 500m exchangeable bond and shareholder loans, adding up to gross debt of around EUR 600m to be repaid between 2019-21 (2019E: EUR 0.1bn; 2020E: EUR 0.5bn; 2021E: EUR 0.05bn). Scope expects the remaining loan value of the exchangeable bond (EUR 451m at YE 2018) to be covered fully by the cash cushion (EUR 84m at YE 2018), potential disposal proceeds from liquid financial assets (EUR 278m at YE 2018), and unused credit facilities (around EUR 800m at YE 2018). Haniel would therefore not have to use its EUR 500m commercial paper programme or issue a new or exchangeable bond.

S-2 short-term rating affirmed

The affirmed short-term rating of the EUR 500m commercial paper programme reflects Haniel’s expected full total cost coverage, the holding’s good standing in public and private debt markets, and well-established banking relationships, partly evidenced by the broad mix of committed long-term credit lines from different banks.

Outlook and rating-change drivers

The Stable Outlook reflects uncertainties around the potential disposal of the remaining METRO shares. As mentioned above, METRO is a major dividend contributor and its loss would have a significant effect on total cost coverage. Given the low visibility over future income sources that can offset a potential METRO disposal, Scope expects total cost coverage beyond 2019 to reduce to a level commensurate with the current rating (1.0x-1.3x).

A positive rating action could be warranted if there was greater visibility that total cost coverage can remain ≥1.3x beyond 2019. For example, if the remaining METRO stake is retained or, if METRO is sold and Haniel can use its investment firepower to substitute the missing dividends through other granular and reliable income sources.

A negative rating action could result if the communicated net debt target was exceeded without being offset by dividend streams from new investee companies, or if total cost coverage showed the potential to deteriorate below 1.0x. Such scenarios are unlikely for the time being.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodology used for this rating and rating outlook (Corporate Rating Methodology) is available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Sebastian Zank, Executive Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The Franz Haniel & Cie GmbH ratings/outlooks were first released by Scope on 23.02.2016. The Haniel Finance GmbH rating/outlook was first released by Scope on 24.02.2017. The ratings/outlooks were last updated on 27.06.2018.

Potential conflicts
Please see www.scoperatings.com. for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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