The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

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

Rating rationale

Haniel’s rating reflects the continued execution of its finetuned investment strategy, which focuses on investments in controlling stakes of mature SMEs. The investments also need to align with Haniel’s new People-Planet-Progress strategy, oriented towards companies or investments with a business purpose addressing global and sustainable megatrends in four areas: i) health and well-being; ii) the circular economy; iii) climate change; and iv) robotics and automation. Recently announced investments in Emma and the Gilde Healthcare V growth capital fund (both in 2020) but also the full takeover of CWS (2019) and the portfolio additions from 2017 in ROVEMA and Optimar fully fit these criteria from Scope’s perspective.

However, Haniel remains dependent on just a few dividend- and income-generating investments, despite ongoing portfolio reshuffling (eight investments in the portfolio as of April 2020) having led to a higher exposure to less correlated industries. However, an improved diversification among dividend- and income-generating assets remains subdued. Specifically, 54% of 2019 income stemmed from CWS dividends, and 93% from the top three income-generating entities. This will likely be amplified in 2020 by Covid-19’s effect on Haniel’s major dividend- and income-generating portfolio companies, which are expected to cut dividends to preserve cash or which are likely to generate lower profits that can be distributed to the holding company.

Over a longer time horizon, however, we are confident that Haniel’s income diversity will strengthen through the use of its large investment headroom, especially when Haniel uses improved conditions for portfolio additions (we expected conditions for buyers to be better than over the past three years in light of less stretched valuations and lower competition between potential bidders for potential M&A targets). Although the further sale of METRO holdings have significantly reduced portfolio liquidity and fungibility, the sale proceeds have provided further headroom to acquire controlling stakes in mature European SMEs. We continue to put less emphasis on Haniel’s reduced exposure to liquid/listed portfolio companies for as long as total cost coverage and liquidity are sufficient to avoid forced asset sales.

While Haniel’s total cost coverage in 2019, at 1.6x, has again comfortably exceeded the 1.3x threshold for a positive rating action for a third year in a row, 2020 will likely show a different picture. Dividend income from METRO has reduced by EUR 28m, but the Covid-19 lockdowns will likely have an even bigger impact on Haniel’s most lucrative income-generating portfolio holdings, with a dividend cut already announced at TAKKT (minus EUR 25m), reduced net profit expectations at CWS, and little or no profit-sharing likely from smaller portfolio companies looking to preserve liquidity. We expect the ratio to drop to 0.6x in 2020, which incorporates a continued EUR 60m dividend pay-out to Haniel shareholders within the total cost base of the holding company.

Nonetheless, we remain confident that total portfolio income (as displayed by our forecasts of a total EUR 67m in 2020) will continue to fully cover operating expenses and maintenance capex, resulting in positive free operating cash flow for 2020. How quickly the major income-generating portfolio companies can return to a dividend/income-paying mode will depend on the duration of Covid-19-related lockdowns and the speed of an assumed macroeconomic recovery. However, the expected temporary shortfall in the full coverage of total costs needs to be seen in conjunction with i) the significantly improved leverage (see next paragraph); ii) the large cash buffer; and iii) the holding’s approach on dividends to the Haniel family. Overall, we remain optimistic about a likely recovery in 2021 and beyond for key income-generating portfolio companies, which would return Haniel’s total cost coverage to at least 1.0x, thereby justifying the current rating level.

Following significant asset disposals in 2019, Haniel’s indebtedness, as measured by the loan-to-value ratio, now stands at an all-time low (3.4% at YE 2019 vs 14% at YE 2018). Although portfolio market gearing remains strongly exposed to the volatility of share prices and applicable valuation multiples for non-listed portfolio companies (with major impacts from recent corrections in value of listed portfolio companies but also from deteriorated valuation multiples for non-listed subsidiaries), the holding company’s leverage is unlikely to deteriorate beyond the 25% threshold in the rating case. This is for two reasons: Scope-adjusted debt is very low at about EUR 0.2bn at YE 2019; and Scope’s sensitivity analysis shows that the portfolio’s market value can decrease by more than 80% before a 25% loan-to-value ratio is reached.

Taking into account Haniel’s communicated net debt ceiling of EUR 1bn and the net financial position at YE 2019 of EUR 600m (comprising net financial debt of EUR 0.1bn and financial assets of EUR 0.8bn), there is potential for investments of EUR 1.7bn. The use of this investment headroom would go hand in hand with increased portfolio market value through new investments, unless the buffer is used for bridging an extended period of insufficient cost coverage or a significant amount of the buffer is used for supporting majority-owned portfolio companies through cash injections.

Haniel’s liquidity continues to be robust. The holding company’s debt burden primarily comprises the remaining portion of the EUR 500m exchangeable bond and shareholder loans, adding up to around EUR 500m of gross upcoming debt repayments between 2020-22 (2020E: EUR 0.5bn; 2021E: EUR 0.05bn; 2022E: EUR 0.05bn). We expect the upcoming redemption (May 2020) of the remaining loan value of the exchangeable bond (~EUR 400m at YE 2019) to be covered fully by the cash cushion (EUR 532m at YE 2019), without the need to draw on the unused multi-year credit facilities (around EUR 700m at YE 2019). Haniel also has no need to deploy its EUR 500m commercial paper programme or issue a new or exchangeable bond. Once the exchangeable bond is redeemed, around EUR 200m of interest-bearing debt will remain, resulting in very limited refinancing risks over the next 2-3 years. In light of this, but also given the aforementioned significant headroom and positive free operating cash flows going forward, Haniel is also not expected to be forced into selling company stakes to cover maturing debt.

Outlook and rating-change drivers

The Stable Outlook reflects our view that the expected drop in total cost coverage in 2020 will be only temporary, with the level recovering to at least 1.0x in 2021 and beyond. This incorporates an assumed recovery of income from portfolio companies or, in case the former scenario is subdued, a reduction in portfolio costs such as dividend pay-outs.

A positive rating action is remote in the short term given the limited visibility on the potential for a significant improvement in total cost coverage, which would entail achieving at least 1.3x on a sustained basis. This, however, could be the result of a more granular investment portfolio.

A negative rating action could result if we were to expect a deterioration in total cost coverage to below 1.0x on a sustained basis. This could be the result of continued pressure on subsidiaries’ income streams beyond 2020 or a lack of effort to reduce total costs at the holding company level. Moreover, the rating could come under pressure if the communicated net debt target of EUR 1.0bn was exceeded without being offset by dividend streams from new investee companies.

Long-term and short-term debt ratings

Long-term debt is affirmed at BBB-, the level of the issuer rating.
Haniel’s short-term rating for the EUR 500m commercial paper programme reflects our view on the company’s robust liquidity profile. This view is based on internal and external liquidity sources, as well as the company’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.

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

Methodology
The methodology/ies used for this rating(s) and/or rating outlook(s) (Corporate Rating Methodology, published on 26 February 2020) is/are available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
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.
With Rated Entity or Related Third Party Participation:                    [YES]
With Access to Internal Documents:                                                 [YES]
With Access to Management:                                                           [YES]
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0 .
Lead analyst Sebastian Zank, Executive Director
Person responsible for approval of the rating: Werner Stäblein, Executive Director
The Franz Haniel & Cie GmbH ratings/outlooks were first released by Scope on 23 February 2016. The Haniel Finance Deutschland GmbH rating/outlook was first released by Scope on 24 February 2017. The ratings/outlooks were last updated on 30 April 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.
 
Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Guillaume Jolivet.