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Rating action

Scope Ratings has today lowered Voith GmbH & Co. KGaA’s BBB issuer rating by one notch to BBB- with Stable Outlook. The S-2 short-term rating remains unchanged.

Rating rationale

Scope has downgraded Voith’s issuer rating due to its M&A activity, which has been more aggressive than previously communicated and is expected to result in a deterioration of the company’s financial risk profile. In December 2019, Voith closed the acquisition of BTG for a gross cash consideration of EUR 319m. The strategic reason for this acquisition is to strengthen Voith Paper’s position as a full-line supplier, given BTG’s complementary product portfolio. At the end of 2019, Voith announced two additional acquisitions: i) 70% of the shares in ELIN Motoren GmbH, an Austrian manufacturer of electric motors and generators for industrial applications with revenues of approx. EUR 120m; and ii) 90% of the shares in Toscotec S.p.A. A, an Italian manufacturer of machines for the tissue and paper industry with revenues of approx. EUR 100m. Voith expects the acquisition of the shares in both companies to be completed in the first six months of the 2020 calendar year.

Scope-adjusted debt (SaD) has increased by EUR 194m to EUR 799m. This increase was mainly driven by higher pensions (+ EUR 122m YoY) due to the fall in discount rates in Germany and the US. Because of the higher SaD, Voith’s net leverage has increased to 2.4x at FY-end 2018-19 (FY-end 2017-18: 1.7x). Scope expects SaD to increase to around EUR 1.3bn at end-September 2020F as a result of the recent M&A activity and a planned capex increase. Here, Scope has factored in around EUR 500m in M&A-related payouts. Furthermore, Scope expects net capex to increase to around EUR 140m and remain elevated in the next two fiscal years due to planned projects. As a result of the recent M&A activity, Scope expects net leverage to increase into the 4.0-4.5x range at end-September 2020F. While Scope expects Voith’s net leverage to subsequently come down, driven by higher EBITDA, it is likely to remain at around 3.5x, at least until end-September 2022F.

Voith’s liquid funds have decreased by EUR 186m, to EUR 774m at end-September 2019 (EUR 960m at end-September 2018). Scope still considers Voith’s liquidity reserves to be adequate. While Voith’s liquidity position is expected to decrease as a result of payments for acquisitions, it still amply covers upcoming maturities.

Scope affirms the S-2 short-term rating.

Rating-change drivers

The Outlook is Stable based on Scope’s expectation that, after the integration of the acquired businesses, Voith’s SaD-to-EBITDA ratio will improve to around 3.5x.

The rating could be upgraded if Voith’s SaD-to-EBITDA ratio improves to below 3.0x on a sustained basis.

A negative rating action could result if the company’s SaD-to-EBITDA ratio remains around 4.0x on a sustained basis, e.g. due to weaker-than-projected profitability.  

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 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: the rated entity, public domain 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: Gennadij Kremer, Associate Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 7 May 2018. The ratings/outlooks were last updated on 18 January 2019.

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
© 2020 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions 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. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

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