Schaeffler AG's Recovery Rating Profile - Standard & Poor's

Recovery Report: 

Schaeffler AG's Recovery Rating 

Profile 

Primary Credit Analyst: 

Antoine Cornu, Paris (33) 1-4420-6796; antoine_cornu@standardandpoors.com 

Recovery Analyst: 

Prajakta Sabnis, London (44) 20-7176-7086; prajakta_sabnis@standardandpoors.com 

Table Of Contents 

Overview 

Legal And Structural Considerations 

Issuer Credit Rating Rationale 

Recovery Analysis 

April 17, 2012 

www.standardandpoors.com/ratingsdirect 1 

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Recovery Report: 

Schaeffler AG's Recovery Rating Profile 

Overview 

• We are providing our recovery analysis on German automotive component and systems and industrial bearings 

manufacturer Schaeffler AG, the borrower of the senior credit facilities, and Schaeffler Finance B.V., the finance 

vehicle and issuer of the senior secured notes. 

• We used a going-concern approach in our valuation of Schaeffler AG, owing to our view of its strong brand name 

and leading positions in certain automotive-component and industrial bearings segments. 

• Our simulated default scenario assumes a payment default in 2015, due to significant deterioration in operating 

performance and reduced free cash flow generation triggered by the group's inability to refinance its syndicated 

facility B maturing in January 2015. 

• Under our assumptions, we arrive at a stressed enterprise value of about €7 billion, resulting in a recovery rating 

of '3' corresponding to meaningful (50%-70%) recovery prospects for the €2 billion equivalent senior secured 

notes and €1.4 billion equivalent facility C2. 

Table 1 

Schaeffler AG Credit Profile 

Corporate credit rating B/Positive/-- 

Estimated gross enterprise value 

at default (Mil. €) 

6,935 

Year of default 2015 

Facility/issue 

Restricted group 

Schaeffler AG 

Senior secured 

Outstanding principal at 

default (Mil. €) Issue rating Recovery rating 

Expected recovery 

(%) Maturity 

Facility B 3,000 NR NR N/A 2015 

Facility C1 600 NR NR N/A 2017 

Facility C2 (euro and dollar 

tranches) 

1,400 B 3 50-70 2017 

RCF 1,000 NR NR N/A 2015-2017 

Schaeffler Finance B.V 

7.75% Senior secured euro notes 800 B 3 50-70 2017 

7.75% senior secured dollar notes 600 B 3 50-70 2017 

8.75% Senior secured euro notes 400 B 3 50-70 2019 

8.50% Senior secured dollar notes 500 B 3 50-70 2019 

Unrestricted Group 

Schaeffler Verwaltungs GmbH 

Junior term loan facility* c.3700† NR NR N/A 2017 

Junior zero coupon bond§ c.2600† NR NR N/A 2018 

Standard & Poors | RatingsDirect on the Global Credit Portal | April 17, 2012 2 

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Table 1 

Schaeffler AG Credit Profile (cont.) 

Schaeffler Holding GmbH&Co. KG 

Junior RCF 250 NR NR N/A 2017 

Ratings as of March 30, 2012. RCF--Revolving credit facility. NR--Not rated. N/A--Not applicable. *Junior term loan facility has a cash interest element and a PIK interest 

element, which accrues at 6% per year. §Junior Zero coupon bond has PIK interest, which accrues at 9.625% per year. †The amount under these instruments is higher 

than the current outstanding amount of €5,134 million, as the debt assumed is the debt in the year of default. 

Legal And Structural Considerations 

Schaeffler is organized into two decks, an upper deck and a lower deck. The lower deck is the restricted group and 

comprises the parent company Schaeffler AG and its subsidiaries (Schaeffler group). The main debt at the lower 

deck comprises: 

• The above mentioned €2 billion equivalent senior secured notes, issued by Schaeffler Finance B.V. due between 

2017 and 2019; and 

• The €6 billion senior credit facilities, borrowed by Schaeffler AG (the latter is made of the initially €8.0 billion 

new senior credit facility minus the €2 billion Term Loan A, not utilized and cancelled as a result of the 

simultaneous raising of the proceeds of the €2 billion equivalent notes). 

Schaeffler Finance B.V. is a 100%-owned special purpose vehicle established for the only purpose of issuing the 

notes. The upper deck comprises all the companies above Schaeffler AG (Schaeffler Verwaltungs GmbH, Schaeffler 

Holding GmbH & Co. KG, and INA Holding Schaeffler GmbH & Co. KG [IHO]; all not rated). The main debt 

located in the upper deck, together called the junior facilities, comprises: 

• An approximately €3 billion (current value) term loan at Schaeffler Verwaltungs GmbH (Schaeffler's parent), 

maturing in June 2017; 

• An approximately €1.8 billion (current value) zero coupon bond due on April 1, 2018, at Schaeffler Verwaltungs 

GmbH; and 

• A €250 million revolving credit facility (RCF) at Schaeffler Holding GmbH & Co. KG (the parent of Schaeffler 

Verwaltungs), maturing in June 2017. 

Schaeffler owns in total 49.9% of the shares of Continental AG with 36.1% shares held indirectly by Schaeffler AG 

and 13.8% held indirectly by Schaeffler Verwaltungs GmbH. The Schaeffler Group is restricted to holding no more 

than 49.9% of the shares in Continental AG by an investment agreement with Continental. The ownership of shares 

in excess of 49.9% tendered under the public tender offer in 2008 have been transferred to independent banks 

(described as the independent third parties in the graph below), which in aggregate own 10.4% of Continental 

shares. 

Recovery Report: Schaeffler AG's Recovery Rating Profile 

An intercreditor agreement between the senior secured noteholders and the lenders of the senior credit facilities 

establishes that the notes and the credit facilities rank pari passu in both right and order of payment in a 

hypothetical scenario of enforcement. However, the credit facilities lenders benefit from stronger protection than the 

noteholders, as described in the paragraph "Documentation/covenants" below. This protection includes, among 

other things, stronger documentation that features certain, relatively tight maintenance financial covenants, 

compared to the notes' documentation loose, incurrence-based consolidated coverage ratio. 


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The junior debt instruments located in the upper deck are not part of the aforementioned intercreditor agreement. 

However, the subordination of the junior term loan, the junior zero coupon bond, and the junior RCF to the senior 

credit facilities and the notes located in the lower deck is, in our view, a function of the following: 

• Their weaker position in the organizational structure (above the parent company Schaeffler AG); 

• Their sole equity claim on the restricted group (on the shares of Schaeffler AG); 

• Their latter maturity vis-à-vis the senior credit facilities, and, their maturity at the same time as the senior secured 

notes (at worst), given an optional redemption right, as described further below in this section; 

• Their security on some relatively limited assets (as described below under the paragraph "Security and guarantee 

package"); and 

• Guarantees only from entities located at the upper deck level, that is, from IHO and Schaeffler Holding. 

However, the junior debt instruments benefit from a relatively strong security package for structurally subordinated 

debt. This package includes: 

• A pledge on the Schaeffler AG shares , the IHO shares , and the shares of entities in the upper deck (Schaeffler 

Holding GmbH & Co. KG and Schaeffler Verwaltungs GmbH); 

• A maintenance financial covenant tied to the performance of Schaeffler; 

• Cross-acceleration language in the junior credit facility in relation to the senior credit facilities and the senior 

secured notes, which means that Schaeffler AG is not ring-fenced in this respect from the upper deck; and 

• Pledges over the Continental shares held by Schaeffler Verwaltungs and the independent third-party banks 

(accounting for 24.2% of Continental's shares). 

The credit support that the senior group in the lower deck can extend to the junior facilities is regulated by the 

documentation of the senior facilities and of the notes. Specifically, as long as the senior credit facility is 

outstanding, the ability of Schaffler AG to upstream cash payments to the upper deck is limited by the facility's 

maintenance financial covenants and payment restrictions. Equally, the company's ability to provide security to any 

junior debt is contractually limited by a fairly tight negative pledge in the documentation of the senior facilities 

borrowed at Schaeffler AG. 


The ability of Schaeffler Verwaltungs GmbH to push down the debt of the upper deck to the Schaeffler AG level (or 

below) is regulated in the senior facilities and senior secured notes documentation by the respective restricted 

payment provision and by the respective limitation on the indebtedness covenant. The restricted payments covenant 

for the senior secured notes allows Schaeffler AG to upstream cash to the upper deck to the extent that there is no 

default at the lower deck, the lower deck complies with the 2.0x consolidated coverage ratio, and any upstreamed 

amount cannot exceed an income basket (50% of consolidated net income), which starts to accumulate the day 

prior to the bond issue date. This restricted payments covenant includes carve outs to the coverage ratio above, but 

which reduce the income basket. These carve outs include permitted dividend payments of €210 million in 2012, 

€245 million in 2013, €290 million in 2014, €325 million in 2015, and €350 million in 2016 and thereafter, and a 

dividend payment pursuant a capital increase at Schaeffler AG whose proceeds would prepay all or part of the 

senior facility. The senior facilities documentation also permits upstream payments in these accounts as annual 

floors, with certain additional upstream payments becoming permitted subject to certain prerequisites. 

Importantly, in case of full repayment of the senior credit facilities at maturity, the notes documentation would 

allow the company not only to raise new debt under the credit facility basket of the notes documentation for up to 


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€8,250 million, but to raise significantly more debt (based on current pro forma EBITDA, headroom would be circa 

€7.0 billion) under the loose 2.0x consolidated coverage ratio test of the limitation on indebtedness covenant. 

Importantly, given that the senior secured notes are due to mature in five to seven years, and that the junior loans 

mature in June 2017, the notes' documentation includes an optional redemption right in the event that the junior 

loans are not successfully refinanced before their maturity date. 

There are no cross-default, cross-acceleration, or cross-security covenants between Schaeffler's debt and that 

incurred by Continental. 

Capital structure 



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Security and guarantee package 

The €2 billion equivalent senior secured notes and the €6 billion equivalent senior credit facilities (the latter is made 

up of the initially €8 billion new senior credit facilities, minus the €2 billion facility A, not utilized and cancelled as a 

result of the simultaneous raising of the proceeds of the €2 billion equivalent notes) benefit from a similar security 

package. This security includes: 

• A pledge over the shares of each subsidiary guarantor, and of each direct or indirect shareholder of the subsidiary 

guarantors that is a subsidiary of Schaeffler AG and certain other key subsidiaries of Schaeffler AG; 

• A pledge over the shares in the notes' issuer, Schaeffler Finance B.V.; 

• A pledge over the shares in Continental AG (B+/Positive/B), indirectly owned by Schaeffler AG (accounting for 

36.1% of the total Continental shares); 

• Security over certain intra-group loan hedging receivables ; and 

• Security over certain accounts receivables and cash-pool accounts, which are limited in value, in our view. 

We understand that the subsidiary guarantors of the senior credit facility represent at least 75% of the consolidated 

gross assets of the restricted group (comprising Schaeffler AG and its subsidiaries), at least 70% of its 

unconsolidated EBITDA, and at least 70% of its consolidated turnover. We also understand that the guarantors of 

the senior secured notes initially represent at least 70% of the restricted group's consolidated EBITDA, at least 75% 

of its consolidated assets, and at least 70% of its consolidated turnover. 

The notes' documentation states that the subsidiary guarantees and the security on the Continental shares can be 

released, under certain circumstances, without the agreement of the senior secured noteholders. This would be the 

case, if, for example, the senior credit facilities were repaid in full, which is to be expected given their earlier 

maturity date of 2015-2017. The full repayment of the senior credit facilities means that security will be released, 

but at the same time leverage will decline. Crucially, we also understand that the senior secured notes will benefit, in 

any possible scenario, from an unconditional and irrevocable guarantee from Schaeffler AG until their final 

maturity. 

Furthermore, according to the documentation for the senior credit facility, the proceeds from a non-distressed sale of 

the Continental shares that are pledged as security for the senior credit facilities and the notes must be used to 

prepay the senior credit facilities. In addition, under certain prerequisites (in particular, a significant reduction of 

total senior debt at the lower deck), the proceeds can be used to prepay the junior facilities. 

Documentation/covenants 

The notes' documentation's debt incurrence test, consisting of a consolidated coverage ratio of 2.0x, is fairly loose. 

In view of the fact that this ratio is about 4.0x based on the parent's pro forma total debt, debt could theoretically 

increase by circa €7.0 billion, at current EBITDA levels, before it reached the 2.0x limit. Further debt can be raised 

via permitted baskets without complying with this ratio, including: 

• Indebtedness under the credit facilities not exceeding €8,250 million (that is, approximately €250 million above 

the committed senior credit facility debt) less the net notes proceeds and permanent repayments with asset sales 

proceeds under the facility's terms; 

• Capital lease obligations not exceeding the greater of €300 million and 2.5% of total assets; 

• A qualified securitization financing of up to €300 million; and 

• Debt by the parent guarantor or restricted subsidiaries not exceeding €500 million. 



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In addition, non-guarantors' restricted subsidiaries can incur debt but are capped in aggregate under the 

consolidated coverage ratio and its carve outs at the greater of €850 million and 8% of total assets. This is a 

relatively loose protection. 

The notes' documentation also includes a fairly tight secured debt ratio test at 3.25x. Further debt can be raised via 

permitted baskets without complying with this ratio, including, a) as regards the collateral: the above mentioned 

credit facility and the above mentioned catch-all basket of €500 million; b) as regards the remaining assets of the 

company; the above mentioned qualified securitization financing, liens on unrestricted continental shares, the above 

stated debt financed capex, and a general basket of 5% of total assets. 

The notes documentation also includes a restricted payments provision described above under the paragraph "Legal 

and Structural Considerations". 

It also contains nonfinancial covenants such as a change-of-control provision, a tight cross default and cross 

acceleration provision above €50 million, and a relatively loose permitted investment provision, with carve outs 

allowing investment for the greater of €600 million and 5% of total assets. 

The documentation of the senior credit facilities is fairly strong. The facilities documentation includes certain 

maintenance financial covenants on leverage, interest coverage, and cash flow coverage, and limitations on capital 

expenditures. They also include nonfinancial covenants restricting disposals, mergers, acquisitions, and dividend 

payments. Permitted indebtedness includes a "special receivable" of €635 million, a withholding Tax Bridge Loan of 

€90 million and an INA Beteiligungsverwaltungs GmbH loan of €65 million--all these amounts are owed by 

Schaeffler AG and its subsidiaries to the companies in the upper deck. The permitted indebtedness basket also 

includes a sale and leaseback transaction of up to €150 million, and other indebtedness of any member of the 

restricted group not exceeding €200 million. The loan documentation also includes a change-of-control clause, a 

cross default clause, and a fairly tight negative pledge. The senior credit facilities include a tight restricted payments 

provision as compared to the senior secured notes. The restricted payments covenant allow the company to 

upstream cash to the upper deck as long as Schaeffler AG complies with the financial covenants and there is no 

default continuing. Under this covenant, cash can be upstreamed for the amount of permitted dividend payments of 

€210 million in 2012, €245 million in 2013, €290 million in 2014, €325 million in 2015, and €350 million in 2016 

and thereafter. It also allows for an amount of 25% of the excess cash flow of the previous financial year, if leverage 

of the restricted group is not more than 2x; any payment from the net proceeds of disposal of unrestricted 

continental shares; and an amount equal to net equity proceeds, which can be used for debt push-down, where the 

net equity proceeds can be upstreamed only when the leverage of the restricted group is not more than 3.125x. 

Jurisdictional/insolvency regime issues 

Schaeffler is headquartered in Germany and benefits from a well-diversified customer base. We assume that the 

primary insolvency proceedings would occur in Germany, which we view as the center of main interest (COMI). 

However, Schaeffler has operations in a number of different countries. In our view, an insolvency process that 

incorporates multijurisdictional proceedings could delay or lower ultimate recovery prospects. We categorize the 

German insolvency regime as 'A2' under our criteria, and consider it relatively friendly for lenders. 

For further information, see "COMIs In EU Insolvency Proceedings And Their Bearing On Standard & Poor's 

Recovery Ratings," published July 8, 2008, and "Debt Recovery For Creditors And The Law Of Insolvency In 

Germany," published March 15, 2007, on RatingsDirect on the Global Credit Portal. 



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Issuer Credit Rating Rationale 

See "Germany-Based Schaeffler Assigned 'B' Corporate Credit Rating; Outlook Positive", published Jan. 27, 2012, 

and "Schaeffler AG", published Jan. 30, 2012 on RatingsDirect on the Global Credit Portal. 

Recovery Analysis 

Table 2 

Schaeffler AG Stressed Valuation 

Simulated default assumptions Simplified waterfall 

Year of default 2015 Gross enterprise value at default €6,935 mil. 

2011 EBITDA €2,243 mil.* Administrative costs €485 mil. 

EBITDA decline to default 48% Net enterprise value €6,450 mil. 

EBITDA at default 1,156 Priority claims €589 mil. 

Implied enterprise value/EBITDA multiple 6x Net value available to creditors €5,861 mil. 

LIBOR/margin rise 3% Senior secured €8,555 mil. 

Note: All debt amounts include six months of prepetition interest. *Reported EBITDA. 

Recovery expectation 50%-70% 

Subordinated €6,774 mil. 

Recovery expectation 0%-10% 

Simulated default scenario 

In order to determine recoveries, we simulate a hypothetical default scenario. In the case of Schaeffler, we believe a 

default would be caused by a deep and prolonged cyclical economic downturn, resulting in lower capacity 

utilization and reduced EBITDA. We believe that the hypothetical default would be compounded by the group's 

inability to refinance its syndicated facility B at maturity, in January 2015. Under our hypothetical scenario, 

EBITDA would decline to about €1,156 million at the point of default in 2015. 

Valuation 

For the purposes of our recovery analysis, we value Schaeffler as a going concern, based on our assessment of its 

"satisfactory" business risk profile. This assessment is underpinned by the company's strong positions in both the 

auto supplier and the bearings manufacturing markets, and its high margins. 

We valued the company using a combination of market multiple and discounted cash flows. Based on Schaeffler's 

historical performance, and comparison with its close peers, we anticipate the enterprise value to EBITDA multiple 

to be about 6x at the point of default. This would result in our estimate of Schaeffler's stressed enterprise value of 

approximately €7 billion at our simulated point of default in 2015. This valuation does not include the company's 

49.9% equity interest in Continental (which, from an accounting standpoint, is consolidated on an at-equity basis in 

Schaeffler's accounts). This is because we perceive the value of this investment as relatively volatile, and note the 

possibility allowed under the documentation that these shares could become unencumbered and sold. 

To calculate recovery, we deducted about €485 million of enforcement costs from the stressed enterprise value of €7 

billion, leaving a net enterprise value of €6.45 billion. We further deducted 50% of pension costs as priority 

liabilities from the net enterprise value, leaving about €5.8 billion of residual value available for the repayment of 

the outstanding senior debt. 



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Outcome 

At default, we assumed about €8.5 billion of senior secured debt to remain outstanding including six months' 

prepetition interest. The senior debt comprises the €3 billion term loan facility B, the €2 billion term loan facilities 

C1 and C2, the €1 billion RCF, the €2 billion senior secured notes, and €165 million of recaptured tax. The latter is 

a tax liability that would be generated if Schaeffler AG sold the shares of a number of subsidiaries over a certain 

period of time. This would translate into meaningful (50%-70%) recovery prospects for the senior secured 

noteholders and the lenders of the term loan facility C2. 

Additional Contact: 

Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com 



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Schaeffler AG's Recovery Rating Profile - Standard & Poor's

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