Schaeffler AG's Recovery Rating Profile - Standard & Poor's
Schaeffler AG's Recovery Rating Profile - Standard & Poor's Schaeffler AG's Recovery Rating Profile - Standard & Poor's
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. Recovery Report: Schaeffler AG's Recovery Rating Profile Standard & Poors | RatingsDirect on the Global Credit Portal | April 17, 2012 6 958466 | 300374394
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. Recovery Report: Schaeffler AG's Recovery Rating Profile www.standardandpoors.com/ratingsdirect 7 958466 | 300374394
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- Page 9 and 10: Outcome At default, we assumed abou
In addition, non-guarantors' restricted subsidiaries can incur debt but are capped in aggregate under the<br />
consolidated coverage ratio and its carve outs at the greater of €850 million and 8% of total assets. This is a<br />
relatively loose protection.<br />
The notes' documentation also includes a fairly tight secured debt ratio test at 3.25x. Further debt can be raised via<br />
permitted baskets without complying with this ratio, including, a) as regards the collateral: the above mentioned<br />
credit facility and the above mentioned catch-all basket of €500 million; b) as regards the remaining assets of the<br />
company; the above mentioned qualified securitization financing, liens on unrestricted continental shares, the above<br />
stated debt financed capex, and a general basket of 5% of total assets.<br />
The notes documentation also includes a restricted payments provision described above under the paragraph "Legal<br />
and Structural Considerations".<br />
It also contains nonfinancial covenants such as a change-of-control provision, a tight cross default and cross<br />
acceleration provision above €50 million, and a relatively loose permitted investment provision, with carve outs<br />
allowing investment for the greater of €600 million and 5% of total assets.<br />
The documentation of the senior credit facilities is fairly strong. The facilities documentation includes certain<br />
maintenance financial covenants on leverage, interest coverage, and cash flow coverage, and limitations on capital<br />
expenditures. They also include nonfinancial covenants restricting disposals, mergers, acquisitions, and dividend<br />
payments. Permitted indebtedness includes a "special receivable" of €635 million, a withholding Tax Bridge Loan of<br />
€90 million and an INA Beteiligungsverwaltungs GmbH loan of €65 million--all these amounts are owed by<br />
<strong>Schaeffler</strong> AG and its subsidiaries to the companies in the upper deck. The permitted indebtedness basket also<br />
includes a sale and leaseback transaction of up to €150 million, and other indebtedness of any member of the<br />
restricted group not exceeding €200 million. The loan documentation also includes a change-of-control clause, a<br />
cross default clause, and a fairly tight negative pledge. The senior credit facilities include a tight restricted payments<br />
provision as compared to the senior secured notes. The restricted payments covenant allow the company to<br />
upstream cash to the upper deck as long as <strong>Schaeffler</strong> AG complies with the financial covenants and there is no<br />
default continuing. Under this covenant, cash can be upstreamed for the amount of permitted dividend payments of<br />
€210 million in 2012, €245 million in 2013, €290 million in 2014, €325 million in 2015, and €350 million in 2016<br />
and thereafter. It also allows for an amount of 25% of the excess cash flow of the previous financial year, if leverage<br />
of the restricted group is not more than 2x; any payment from the net proceeds of disposal of unrestricted<br />
continental shares; and an amount equal to net equity proceeds, which can be used for debt push-down, where the<br />
net equity proceeds can be upstreamed only when the leverage of the restricted group is not more than 3.125x.<br />
Jurisdictional/insolvency regime issues<br />
<strong>Schaeffler</strong> is headquartered in Germany and benefits from a well-diversified customer base. We assume that the<br />
primary insolvency proceedings would occur in Germany, which we view as the center of main interest (COMI).<br />
However, <strong>Schaeffler</strong> has operations in a number of different countries. In our view, an insolvency process that<br />
incorporates multijurisdictional proceedings could delay or lower ultimate recovery prospects. We categorize the<br />
German insolvency regime as 'A2' under our criteria, and consider it relatively friendly for lenders.<br />
For further information, see "COMIs In EU Insolvency Proceedings And Their Bearing On <strong>Standard</strong> & <strong>Poor's</strong><br />
<strong>Recovery</strong> <strong>Rating</strong>s," published July 8, 2008, and "Debt <strong>Recovery</strong> For Creditors And The Law Of Insolvency In<br />
Germany," published March 15, 2007, on <strong>Rating</strong>sDirect on the Global Credit Portal.<br />
<strong>Recovery</strong> Report: <strong>Schaeffler</strong> <strong>AG's</strong> <strong>Recovery</strong> <strong>Rating</strong> <strong>Profile</strong><br />
www.standardandpoors.com/ratingsdirect 7<br />
958466 | 300374394
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