Is Schaeffler junk soon

Schaeffler is worried about the hardback investment grade rating. Thus, the chances of the auto parts supplier in the fight against the junk status.

Sales panic looks different, but nevertheless the capital market story of Schaeffler has received a sweep. S & P's announcement last week to place the Schaeffler rating from BBB- to negative outlook has resulted in price losses of between 0.5 and 1 per cent of the nominal value of Schaeffler's outstanding bonds. 

With prices between 102 and 110 percent, they are still all comfortably above par. Nevertheless, the automotive supplier has begun to fear that the sharp slump in the auto industry will ruin the momentum of recent years. The then Schaeffler CFO and today's CEO Klaus Rosenfeld had to pursue ironic austerity for almost ten yearsto persevere to lead the family business from the brink of bankruptcy to the good debtors' camp: it was not until late summer 2018 before all three major rating agencies raised S & P, Moody's, and Fitch Schaeffler to investment grade levels.

How big is the risk that Schaeffler will now sink back into the junk area? S & P even quantified it: the rating agency sees a one-third likelihood of a downgrade over the next 12 to 24 months unless Schaeffler is able to raise its profit margin. And there, the tendency is questionable: In 2016, 12.7 percent to beech, the EBIT margin in the past two years fell over 11.3 to 9.7 percent. For this year, the management even expects only 7 to 8 percent. If S & P makes its announcement true, Schaeffler would lose the investment grade rating with the first downgrade.

Schaeffler is considering short-time working

While management can hardly influence the demand behavior of its major customers, Rosenfeld and CFO Dietmar Heinrich , who came into office two years ago as CFO , must deliver in other places: Above all, S & P demands that the planned efficiency measures be implemented swiftly and smoothly. 

Deep cuts such as mass cancellations or plant closures are not yet planned by Rosenfeld and Heinrich. To a moderate extent, however, they do reduce capacities, and Schaeffler has already announced short-time work for individual locations. From December, the working hours of many employees will be reduced from 40 to 35 hours. In addition, management has cut back on current investment plans for the current year, focusing investments more on the growth area of e-mobility.     

FINANCE heads

Klaus Rosenfeld, Schaeffler AG

Rosenfeld starts his professional career by training as a banker at Dresdner Bank . After completing his studies, Rosenfeld returned to the bank in 1993, where he worked until 1997 in ...

How much can Schaeffler cut its dividend?

Another, actually simple and undoubtedly effective measure is also in the room, but is not publicly discussed by the management - the reduction of the lush dividend. Last year, Schaeffler distributed 361 million euros to its shareholders. For the current year S & P calculates with a dividend reduction by 20 to 30 percent, but this would correspond to the current price still a dividend yield of about 7 percent. This would be saving potential.

However, the high amount of payouts has a tangible background: The holding company of the Schaeffler family of entrepreneurs still carries billions in debt, which had arisen when Schaefflers bought up almost half of the shares in its competitor Continental just before the onset of the financial crisis. Even eleven years later, the family's investment holding company still needs high dividends from Schaeffler and Continental in order to pay off its debts. 

S & P is quite clearly positioning itself: "Schaeffler has only limited opportunities to reduce its own debt, provided management does not get through to a substantial dividend cut." But three-quarters of the dividend goes to Schaefflers.   

Low price, high dividend (one-year chart of the Schaeffler share)

It's not all bad at Schaeffler

Unlike S & P, Moody's and Fitch maintain the stable outlook for the Schaeffler rating. They regard the current weakness as temporary and rely on a timely turnaround in the core business with the auto companies. In addition, Schaeffler is not a pure automotive supplier. Although this division accounts for 62 percent of sales, it only contributes 30 percent of Ebits. The other two divisions "Aftermarket" and "Industry" are developing better. After a successful efficiency program, the industrial division even shines with rising sales and profits.   

Fitch also notes positively that the austerity measures already introduced should help stabilize net income from next year. In addition, Schaeffler continues to drive up the production of systems for electric cars. The resulting economies of scale bring the break-even of this new business pillar slowly in sight. In addition, Fitch estimates that the current investment cycle of the franc will reach its peak next year. However: "The headroom of the rating is only moderate," warns also Fitch.

FINANCE heads

Dietmar Heinrich, Schaeffler AG

After completing his studies at the Karlsruhe University of Technology, Dietmar Heinrich started his career in 1990 in the controlling of the family business Alfred Kärcher , a ...

CFO Heinrich needs investment grade rating

After all, Schaeffler is not threatened with an immediate financing problem: According to S & P, Schaeffler still has more than 50 percent of its covenants on its own bonds. There are no noteworthy short-term maturities, only in 2022 is a bond over 750 million euros due. 

Nevertheless, a relapse into the junk sector would bring Schaeffler CFO Heinrich tangible disadvantages: In financial year 2018 , Schaeffler was able to trigger collateral security from loan agreements and bonds as a result of the rating upgrades . This relief would possibly be lost with a downgrade.

In addition, Heinrich has launched a program that prepares the issue of investment grade bonds with a volume of up to 5 billion euros the way. Even this groundbreaking step threatens to endanger. Accordingly, Heinrich clearly positioned himself on the subject of rating: "We want to establish long-term investment grade," said the CFO in March.