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Rating action

Scope Ratings GmbH (Scope) has affirmed its issuer ratings of BBB-/Stable on Germany-based Franz Haniel & Cie. GmbH. Senior unsecured debt has been affirmed at BBB-; short-term rating has been affirmed at S-2.

The issuer rating, short-term rating and senior unsecured debt category ratings of Haniel’s financing subsidiary Haniel Finance GmbH have been likewise affirmed, at BBB-/Stable, S-2 and BBB- respectively. No long-term debt is currently outstanding.

Rating rationale

Haniel’s rating reflects the continued execution of its finetuned investment strategy which focuses on investments in controlling stakes of mature SMEs. More specifically, such investments need to match a business purpose that is in line with Haniel’s ‘People, Planet, Progress’ strategy. This strategy focuses on companies/investments that serve global and sustainable megatrends in the area of: i) healthcare; ii) safety products and services; iii) clean technology; iv) circular economy; v) food and agriculture; vi) smart mobility; vii) industrial automation and robotics; and viii) industrial equipment (ESG factor: credit-positive factor that is likely to support a sustained business profile).

The ongoing portfolio reshuffle, with ten investments as of April 2021, has immediately improved net asset value (+23% at the end of 2020, year-on-year) and provided exposure to a higher number of industries with only a limited correlation. At the same time, the effect on diversification among dividend- and income-generating assets remains subdued. As expected, Covid-19 further limited Haniel’s income diversity in 2020, as major dividend- and income-generating portfolio companies cut shareholder payouts in order to preserve cash. Over the longer term, however, Scope is confident that Haniel’s dividend diversity will be gradually strengthened thanks to its large investment headroom. Nevertheless, income concentration is likely to be high in the medium term, as Scope’s conservative base case assumes no dividends from CECONOMY or the new investments in BauWatch and Emma until 2023. While this might be unrealistic given the abovementioned companies’ high growth rates, it also highlights the Haniel portfolio’s dependence on CWS performing well for the next few years, until greater income diversification can be achieved. Although the further sale of METRO has significantly reduced portfolio liquidity and fungibility, Scope notes that sale proceeds have provided further headroom to acquire controlling stakes in mature European SMEs. Scope continues to attach less importance to Haniel’s reduced exposure to liquid/listed portfolio companies as long as there is sufficient visibility that Haniel does not require asset sales given a sustained sufficient total cost coverage and adequate liquidity profile.

Haniel’s credit strength is underpinned by a solid total cost coverage of 1.1x in 2020 – a year that was largely characterised by cash retention on the part of portfolio companies, given the uncertainties around the potential impact on business performance of Covid-19 related restrictions. Scope forecasts that Haniel will retain full cost coverage over the next three years. The total cost coverage ratio should trend at the upper end of the 1.0x-1.3x range, which supports the credit rating. This is largely bolstered by Scope’s expectations about reduced holding company costs, following the concluded restructuring between 2019 and 2020 and higher expected income contributions (such as dividends and profit-sharing) from its major three portfolio companies, primarily CWS but also TAKKT (including a special dividend payout in 2021) and METRO. Resumed dividend payouts from CECONOMY and smaller portfolio ventures could provide some further upside. However, Scope also believes that Haniel is likely to balance higher income from portfolio companies with shareholder remuneration such as dividend payouts to its own shareholders and share buybacks, that are in line with growing portfolio income.

Haniel’s indebtedness is very comfortable, with a low Scope-adjusted loan-to-value ratio of about 3% at YE 2020. This is largely supported by the holding company’s fairly low net financial debt exposure of about EUR 150m (Scope-adjusted debt) – mostly related to shareholder loans from Haniel family members – and the strong value appreciation of Haniel’s portfolio market value to EUR 5.5bn (up from EUR 4.5bn at YE 2020). The holding company’s low net debt exposure retains large headroom for additional debt that can be used for portfolio additions or to support portfolio companies through cash injections funded at the holding level. In light of Haniel’s proven slow portfolio ramp-up, Scope anticipates no major changes to portfolio market gearing. Scope calculates that Haniel retained significant headroom of about EUR 1.6bn on new debt before the recent acquisition of BauWatch. This headroom could be used for further portfolio developments before reaching the publicly communicated net debt ceiling of EUR 1bn. The holding company’s relative indebtedness remains strongly exposed to market volatility via fluctuating share prices and moving multiples used for valuating non-listed portfolio companies. Therefore, Haniel’s portfolio market value would have to deteriorate by 85% before reaching a loan-to-value ratio of 25%. As such, Haniel’s financial position remains strong, as expected for its investment grade rating.

Haniel’s liquidity continues to be strong. Following the full redemption of the EUR 500m exchangeable bond in 2020, the holding company faces debt repayments adding up to about EUR 200m over the next three years (EUR 117m in 2021, around EUR 50m in 2022, and around EUR 30m in 2023). Most of this is related to the shareholder loan from Haniel family members. Incorporating an expected total coverage of above 1.0x over the term, a cash cushion of EUR 156m at YE 2020 and an undrawn amount of EUR 755m from committed multi-year credit facilities, these maturities are comfortably covered with basically no refinancing risks that would necessitate the sale of any shareholdings.

Outlook and rating-change drivers

Scope maintains the Stable rating Outlook, reflecting the agency’s expectations that Haniel will keep sustained total cost coverage within a range of 1.0-1.3x with good headroom to reaching the lower end of this range. This implies that cash contributions from portfolio companies would have to fall short Scope’s forecasts by more than 10% before total cost coverage drops below 1.0x.

A positive rating action could be warranted if Scope expects total cost coverage of above 1.3x on a sustained basis, also bolstered by a more granular recurring cash inflow from portfolio companies. This could be the result of a more granular investment portfolio with dividend payments or profit sharing from more than the strongest three ventures at present.

A negative rating action could result if the holding company exceeds its communicated net debt target, without offsetting this through additional dividend streams from new investee companies, or if Scope expects total cost coverage to deteriorate to a level below 1.0x.

Long-term and short-term debt ratings

Haniel’s financing subsidiary Haniel Finance Deutschland GmbH currently does not have outstanding public debt.

Long-term debt issued by either or Franz Haniel & Cie. GmbH or Haniel Finance Deutschland GmbH is affirmed at BBB-, the level of the issuer rating.

Haniel’s short-term rating is affirmed at S-2. This reflects Scope’s view on the company’s robust liquidity profile, incorporating internal and external liquidity sources. It also reflects Haniel’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.

One or more key drivers of the credit rating action are considered an ESG factor. 

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

Methodology
The methodology used for these Credit Ratings and Outlooks, (Corporate Rating Methodology, 26 February 2020), is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed
Lead analyst: Sebastian Zank, Executive Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Franz Haniel & Cie GmbH Credit Ratings/Outlook were first released by Scope Ratings on 23 February 2016. The Credit Ratings/Outlook were last updated on 30 April 2020.
Haniel Finance Deutschland GmbH Credit Ratings/Outlook were first released by Scope Ratings on 24 February 2017. The Credit Ratings/Outlook were last updated on 30 April 2020.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures 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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