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Rating action

Scope Ratings GmbH (Scope) has downgraded the issuer rating on German mechanical engineering company Voith GmbH & Co. KGaA to BB+ and changed the Outlook from Negative to Stable. The short-term rating has been downgraded to S-3.

Rating rationale

The rating action mainly reflects the deterioration in the financial risk profile (unchanged at BB-) over the last years, the still low profitability, and the upcoming acquisition of the remaining stake in Voith’s hydro unit, which will burden credit metrics in FY 2021-22.

Between FY 2016-17 and FY 2018-19, the financial risk profile benefited from high liquidity supported by the KUKA share sale proceeds but was negatively impacted by the high multiple paid in the BTG, Toscotec and ELIN Motoren acquisitions. Scope-adjusted debt (SaD) increased to EUR 928m at the end of FY 2020-21 from EUR 560m at the end of FY 2016-17, mainly due to the EUR 400m of Schuldschein issued with terms of five, seven and 10 years. However, the comparability of SaD to previous years’ figures is distorted by Scope’s application of a lower net pension obligation adjustment since FY 2020-21, at two-thirds from the full amount previously. The reason is that pension assets have exceeded annual pension payments by threefold for several years, and Scope considers this sustainable. In FY 2020-21, SaD/Scope-adjusted EBITDA (SaD/SaEBITDA) was 3.7x. The improvement from 5.5x in FY 2019-20 (2018-19: 2.4x) was mainly driven by decreased SaD by around EUR 370m, a result of a reduction in trapped cash after cash was repatriated from China and the lower pension adjustment.

In addition to the impact from higher M&A-driven indebtedness, credit metrics suffered from lower EBITDA, reflecting lower revenues, higher restructuring costs, higher materials prices and an unfavourable product mix.

In Scope’s base case, SaD/SaEBITDA is expected to increase to around 4.0x in FY 2021-22, to be burdened particularly by the Voith Hydro transaction. For FY 2022-23, SaD/EBITDA is expected at around 3.5x, based on no material M&A activity and a SaEBITDA of around EUR 300m.

The business risk profile, still rated at BBB, continues to be supported by Voith’s position in the mechanical engineering market and its diversification. The still low profitability in a peer group context continues to be the main constraint. The SaEBITDA margin improved slightly to 5.9% in FY 2020-21 (5.7% in FY 2019-20), reflecting a reduction in the other operating result (mainly due to a decline in expenses from additions to provisions) and headcount (which dampened the impact in relation to revenues of the higher overall personnel costs). These cost savings, however, were absorbed by the higher cost for materials, compounded for Voith by the reduced revenue share of services, particularly in its hydro division. SaEBITDA increased to EUR 253m in FY 2020-21 against EUR 237m from the period before. SaEBITDA and its margin benefited from higher revenues (+2.1% YoY to EUR 4.3bn) due to the full-year effect (around EUR 160m) of an acquisition made in the previous year.

The sharp rise in new orders is credit-positive, up by around EUR 1bn or 24% YoY. This was largely due to the paper division (around EUR 590m or +35% YoY), reflecting the strong investment in its new lines and the rebuild of paper packaging production to keep up with the boom in online business. The hydro unit increased orders by EUR 280m or 32% YoY. The turbo unit (+EUR 109m or 8% YoY) benefited from the full-year effect of the previous year’s acquisition. The order backlog with EUR 6.2bn at FY 2020-21 was at an all-time high.

However, the high order backlog will only slowly translate into revenue growth, due to the long project times customary in the large-scale plant business. The continuing global supply chain interruptions are expected to have a negative impact on Voith’s revenues. That said, Scope still expects revenues to grow, largely driven by the paper division, to around EUR 4.4bn (+3% YoY) in FY 2021-22 and to around EUR 4.5bn (+3% YoY) in FY 2022-23. The SaEBITDA margin is expected to reach 6.0% in FY 2021-22, due in large part to scale effects in Voith Paper projects, cost savings from the Boost Project (launched in November 2020 in Germany), and the completion of the site closure and relocation from Sonthofen to Crailsheim. The SaEBITDA margin is expected to reach 6.6% in FY 2022-23.

Scope considers Voith’s liquidity reserves to be ‘adequate’ given the short-term debt coverage of more than 100%. Here, Scope notes positively that recent acquisitions were financed with long-term Schuldschein debt, comprising three tranches with terms of respectively five, seven and 10 years.

Scope deems environment to be a positive ESG factor. 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 22% of Voith’s revenues in FY 2020-21. Voith also acts as a supplier and not as a main contractor, which reduces environmental-related litigation risks. (ESG factor).

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

Outlook and rating-change drivers

The change in Outlook from Negative to Stable reflects Scope’s expectation of increased revenues in FY 2021-22 based on the record-high order backlog at FY 2020-21. The Stable Outlook also reflects the expectation of no other material M&A apart from the hydro transaction.

A rating upgrade may be warranted if the SaEBITDA margin improved substantially to around 8%, resulting in SaD/SaEBITDA reducing to below 3.0x.

A negative rating action is possible if the rating base case did not materialise, for example, through a failure to improve SaEBITDA in the near future or launch new capital allocation measures, resulting in a SaD/SaEBITDA of above 4.0x on sustained basis.

Long-term and short-term debt ratings

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

In line with the issuer rating and based on Scope’s liquidity assessment, Scope downgrades the short-term rating to S-3.

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/or Outlook (Corporate Rating Methodology, 6 July 2021), 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/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Gennadij Kremer, Associate Director
Person responsible for approval of the Credit Ratings: Tommy Träsk, Director
The Credit Ratings/Outlook were first released by Scope Ratings on 7 May 2018.The Credit Ratings/Outlook were last updated on 14 January 2021.

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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