ZF Friedrichshafen AG

The negative outlook reflects our view that ZF could find it difficult to restore credit metrics in line with the current rating, such that its FFO to debt and its free operating cash flow (FOCF) to debt would fail to recover to above 20% and 10%, respectively, in the next 12-18 months. We could lower the rating if we conclude that our forecast adjusted FFO to debt for ZF is unlikely to recover, owing to prolonged weakness in global automotive markets or a more significant decline in its commercial vehicles' operations. At the current rating level, we would expect our adjusted FFO to debt metric for ZF to approach 20% in 2021 and FOCF to debt to improve to almost

...S&P Global Ratings believes ZF Friedrichshafen AG's (ZF's) "Transformation Collective Agreement" could lead to improved rating headroom, which is currently limited. ZF's credit metrics weakened significantly during 2020 due to the COVID-19 pandemic-related fall in global car production and the closing of the debt-financed 7.3 billion Wabco acquisition. Under our base case, this will cause S&P Global Ratings adjusted debt to EBITDA to rise to 6.5x-7.0x by year-end 2020 from 2.8x in 2019, and result in funds from operations (FFO) to debt decreasing to 11%-14% in 2020 from 28.9% in 2019. Such levels are not commensurate with our current '##+' rating on ZF, but we expect that ZF will gradually restore rating headroom through improved earnings and cash flows over the next two years. In particular, we expect adjusted debt to EBITDA will improve to below 4x in 2022. Part of the recovery should come from volumes, however we forecast that ZF's main end markets (light vehicles and trucks end-markets...

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