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

Rating action

Scope Ratings affirms the BBB- issuer rating for Voith GmbH & Co. KGaA but changes the Outlook from Stable to Negative. The S-2 short-term rating remains unchanged.

Rating rationale

The change in Outlook reflects Scope’s revised expectations regarding revenues and profitability, affecting the pace at which Voith’s deteriorated credit metrics can recover after recent M&A transactions. Since the FY 2016-17, Voith’s financial risk profile has benefited from its relatively high liquidity position, driven by the proceeds from the sale of KUKA shares in 2017. In Scope’s last rating review, the agency anticipated that Voith’s more intense than previously communicated M&A activity would have sustained negative impacts on its financial risk profile. As a result, Scope downgraded the issuer rating from BBB/Stable to BBB-/Stable in January 2020. Scope’s expectation was that after jumping into the 4.0-4.5x range in FY 2019-20 due to M&A activity, the company’s SaD/EBITDA would improve to around 3.5x by FY-end 2021-22 supported by higher EBITDA. As expected, Voith’s credit metrics were clearly weaker in FY 2019-20, with an even stronger than anticipated decline in SaD/EBITDA to 5.5x (2018-19: 2.4x), reflecting an unexpectedly sharp drop in EBITDA. Scope-adjusted EBITDA was EUR 237m in FY 2019-20 vs. EUR 331m previously.

The further development of the SaD/EBITDA ratio will depend on: i) M&A activity; and ii) the strength of the recovery in revenue and EBITDA. Based on Scope’s discussions with management, the agency expects some add-on acquisitions for FY 2020-21. Scope has factored in M&A related payments of around EUR 70m. The rating agency expects no material M&A activity in FY 2021-22. It has adjusted downwards its EBITDA expectation for FY 2020-21 as it expects lower revenues and higher restructuring expenses. SaD/EBITDA is expected to remain above 5.0x at FY-end 2020-21. Full-year effects from the transactions will only have a small impact on SaD/EBITDA in FY 2020-21. While Scope still expects SaD/EBITDA to recover in FY 2021-22 driven by higher revenues, the recovery to around 3.5x (the level commensurate with the current rating) is now less probable, in view of the agency’s weaker EBITDA expectations.

According to Voith, the ‘trapped cash’ issue has strong management attention. The company plans to reduce trapped cash to around EUR 150m (EUR 238m at FY-end 2019-20) in the medium term through cash transfers to Germany. The planned reduction of trapped cash is likely to be rating positive; however, Scope lacks clarity on the size and timing of the reduction.

Voith’s unchanged BBB rated business risk profile continues to be supported by its market positioning and diversification. The deterioration in profitability is still the main restraining factor for Voith’s business risk profile. The Scope-adjusted EBITDA margin fell to 5.7% vs. 7.7% in FY 2018-19. Scope has adjusted downwards its EBITDA margin expectation for FY 2020-21. As part of its plan to increase efficiency, Voith intends to reduce personnel expenses through headcount cuts. However, the settlement payments involved are set to weigh on profitability in FY 2020-21 and 2021-22. In this context, Voith has informed Scope that its restructuring expenses will be higher than communicated one year ago, close to the level in FY 2019-20 (roughly EUR 59m). Moreover, Scope has adjusted downwards its revenue expectation. Revenues have proved to be quite resilient and were down by only 3% YoY to EUR 4,173m. The Covid-19 related recession has impacted revenues less than orders received (-14% YoY) due to the long lead times in plant engineering. Voith has announced that FY 2020-21 will be a year of transition with revenues only slightly up on FY 2019-20. Scope expects revenues in FY 2020-21 to be at around EUR 4.26bn (around +2% YoY, previous expectation: EUR 4.8bn), mainly due to the full year effects of transactions in FY 2019-20. While Scope expects restructuring expenses to remain high in FY 2021-22, there is low visibility with regard to revenues. Scope’s base case anticipates that revenues will increase to EUR 4.4bn (+4% YoY) in FY 2021-22. This is below the rating agency’s previous expectation of EUR 4.8bn in revenues. Scope now expects a Scope-adjusted EBITDA margin down to 5.5% in FY 2020-21 (previously 8.4%) and 6.8% in FY 2021-22 (previously 8.7%).

Despite lower EBITDA, Voith had very solid cash flows in FY 2019-20. Operating cash flow increased to EUR 234m (previous year: EUR 46m) thanks to net working capital (NWC) management. Capex of EUR 96m was below the previous fiscal year’s level of EUR 113m due to the postponement of some major investments. Voith’s free operating cash flow (FOCF) of EUR 152m was at its highest level in the last ten years. Scope expects FOCF to be around zero in FY 2020-21. Scope also expects higher net working capital as well as payments for the repair of a large-scale customer plant, restructuring and personnel adjustments to weigh on FOCF in FY 2020 21. Scope expects FOCF to increase to around EUR 65m in FY 2021-22, supported by higher EBITDA and lower allowance and restructuring payments. Here, Scope has factored in net capex of around EUR 95m in FY 2020-21 and around EUR 115m in FY 2021-22.

Scope considers Voith’s liquidity reserves to be ‘adequate’ given short-term debt coverage at more than 100%. The rating agency views positively the fact that recent acquisitions have been financed with long-term debt, comprising three tranches of a note loan with terms of five, seven and ten years.

Voith is one of the leading companies in the global hydro equipment sector and benefits from the trend towards renewables. The Hydro division accounted for 23% of Voith’s revenues in FY 2019-20. Scope also notes in this context, that Voith acts as a supplier, rather than as a main contractor, which reduces the risk of being sued for violations of environmental requirements (ESG factor: positive environmental factor)

Outlook and rating-change drivers

The change in Outlook from Stable to Negative reflects Scope’s revised expectations regarding revenues and profitability, affecting the pace at which Voith’s deteriorated credit metrics can recover after recent M&A transactions.

A negative rating action could result if Scope’s base case materialises and Voith fails to improve its EBITDA in the near future, with SaD/EBITDA remaining higher than 4.0x on a sustained basis. A negative rating action could also result if Voith continues to carry out aggressive M&A transactions.

In order to return to a Stable Outlook, Voith’s SaD/EBITDA would need to improve to around 4.0x in the near future, e.g. driven by a stronger than expected recovery in EBITDA. Scope may upgrade the rating if Voith improves its SaD/EBITDA to below 3.0x on a sustained basis, although this is a remote possibility.

Long-term and short-term debt ratings

Voith currently has no outstanding long-term debt instruments to be rated.

Scope affirms the S-2 short-term rating in line with the issuer rating and based on the agency’s liquidity assessment.

One or more key drivers for the credit rating action are considered ESG factors.

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 these ratings and/or rating outlook (Corporate Rating Methodology, 26 February 2020) is 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.
The following substantially material sources of information were used to prepare the credit rating: public domain, issuer 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. The credit rating and/or outlook is UK endorsed.
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 13 January 2020.

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
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.