Schaeffler AG

IHO is focusing on deleveraging but we see some risks from the currently weak market environment. We now see limited room for the the IHO group to deleverage in the coming two years given continued margin pressure for Schaeffler, predominantly in its auto original equipment segment. This led Schaeffler to reduce its earnings expectations with the release of its half—year results for 2019. We also see some risk that IHO will receive lower dividends from Schaeffler and Continental in the coming years should industry prospects remain weak. We still acknowledge, however, IHO group's financial flexibility, provided by its 46% stake in Continental, which is worth about €12 billion. The company is actively looking to increase its share in its e-Mobility

...A 46% stake in Continental AG supports a consistent focus on deleveraging at holding company IHO and strong financial flexibility. The rating on Schaeffler AG 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. Furthermore, some managers still have dual functions, which is why we consider IHO's debt and operating cash flows in analyzing Schaeffler's creditworthiness. Schaeffler's adjusted debt of about 5.0 billion translated into funds from operations (FFO)-to-debt of about 34.3% in 2018, whereas additional debt of about 3.9 billion at the IHO group level translates into adjusted FFO to debt of only 23.6% for the whole group in 2018. IHO is focusing on deleveraging but we see some risks from the currently weak market environment....

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