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

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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. Recovery Report: Schaeffler AG's Recovery Rating Profile 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 Standard & Poors | RatingsDirect on the Global Credit Portal | April 17, 2012 4 958466 | 300374394
€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 Recovery Report: Schaeffler AG's Recovery Rating Profile www.standardandpoors.com/ratingsdirect 5 958466 | 300374394
Page 1 and 2: Recovery Report: Schaeffler AG's Re
Page 3: Table 1 Schaeffler AG Credit Profil
Page 7 and 8: In addition, non-guarantors' restri
Page 9 and 10: Outcome At default, we assumed abou

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

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