Continental AG in State Aid Negotiations

Continental AG and its controlling shareholder, Schaeffler Group, are reportedly seeking aid from two German state governments. According to a Bloomberg report, German federal government isn’t directly involved in the “advanced talks” with the Lower Saxony and Bavaria state authorities. On 27 January representatives of the IG Metall trade union told reports that any state aid should be used to help save jobs and “not the private wealth of company owners Maria-Elisabeth Schaeffler and her son Georg.” The union, which represents a total of 2.3 million employees, said workers should also get a say in running the company.

Meanwhile, credit rating agency, Standard & Poor’s, has lowered Continental AG’s creditworthiness two levels to ‘BB’ from ‘BBB-‘. According to an S&P statement the decision was made following an analysis of Continental’s revised business plan and the renegotiation of financial covenants. Continental AG is currently responsible for servicing an estimated 22 billion euros of debts.

The outlook is negative. “The downgrade reflects our view that Continental appears unlikely to achieve our debt-protection requirements of funds from operations (FFO) to debt of 25 per cent and debt to EBITDA of less than 3x, which we formulated in September 2008,” said Standard & Poor’s credit analyst Werner Staeblein. “It also reflects the refinancing risks the company faces in 2010 and the potentially negative impact of Continental’s majority ownership by Schaeffler AG.”

The short-term corporate credit rating on the group was lowered to ‘B’ from ‘A-3’. At the same time, the ratings were removed from CreditWatch where they were placed with negative implications on 15 December 2008.

The statement continued: “In January 2009, Continental renegotiated the financial covenants for its 11.8 billion euro syndicated loan facility, which forms the bulk of its debt. Financial covenants for 2009 provide adequate headroom, which may, however, become tight in 2010 if the environment in the global auto markets deteriorates further.”

“We expect Continental to be able to post low free operating cash flow in 2009, and the company is likely to preserve cash by lowering investments and cutting dividends, …ratings do not currently contain flexibility for larger debt-funded acquisitions, share repurchases, or other forms of shareholder remuneration,” added Staeblein.