Schaeffler AG

The company is actively looking to increase its share in its E-Mobility segment (a new business division, where Schaeffler combines products and systems for hybrid and battery-electric vehicles, but which still represents a rather low share of group revenues of 3% in the first nine months of 2018). We consider Schaeffler to have relatively high exposure to internal combustion engine technology, which it will need to replace gradually with alternative electrified products in the coming years. While the company has substantial scale and financial flexibility to absorb higher investments and selective bolt-on acquisitions to strengthen its position, we see a risk that failure to do so could weaken Schaeffler's growth prospects and profitability. The stable outlook reflects our expectation that

...Consistent focus on deleveraging at holding company IHO and strong financial flexibility supported by a 46% stake in Continental AG. The rating on Schaeffler is held back by the higher leverage of the IHO group (Schaeffler and its holding companies IHO Verwaltungs GmbH, IHO Beteiligungs GmbH, and IHO Holding GmbH & Co. KG) compared with Schaeffler on a stand-alone basis (see chart). IHO group controls Schaeffler through its indirect 75% capital stake and 100% voting rights, which is why we equalize our long-term rating on Schaeffler with IHO group's '###-' group credit profile (GCP), which is one notch lower than Schaeffler's stand-alone credit profile (SACP). Schaeffler's adjusted debt of about 4.6 billion translated into funds from operations (FFO) to debt of about 39.5% in 2017, whereas additional debt of about 4.3 billion at the IHO group level translates into adjusted FFO to debt of only 26% for the whole group in 2017. We note, however, IHO's focus on deleveraging and expect the group's...

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