Investing.com -- Moody’s Ratings has downgraded the long-term senior unsecured ratings of Schaeffler AG (ETR:SHA_p), a German automotive parts and industrial company, from Baa3 to Ba1. The group’s Baa3 issuer rating has been withdrawn and replaced with a Ba1 corporate family rating (CFR) and Ba1-PD probability of default rating. Furthermore, Schaeffler’s senior unsecured debt issuance program rating has also been downgraded from (P)Baa3 to (P)Ba1. Moody’s has revised the outlook for the group from negative to stable.
The downgrade is largely due to the challenging environment in Schaeffler’s end markets and the high costs associated with transitioning to electrification. These factors are expected to put pressure on Schaeffler’s margins and keep leverage high for the next two years. The stable outlook is predicated on the anticipated benefits from integrating Vitesco Technologies Group AG into Schaeffler, which should help improve profitability and achieve metrics and free cash flow generation consistent with a Ba1 rating in the next 12-18 months, according to Matthias Heck, Moody’s Ratings Vice President – Senior Credit Officer.
The rating downgrade reflects the weakened environment in Schaeffler’s end markets, particularly the global automotive industry and industrial end markets, such as the Chinese wind power market. This weakness led to profit warnings in July 2024 and January 2025. Schaeffler’s 2024 full year adjusted EBIT margin was 4.5%, falling short of the initial guidance of 6%-9%.
On March 5, 2025, Schaeffler released its 2024 results and projected an adjusted EBIT margin of 3%-5% for 2025, including a dilutive effect from the first full-year full consolidation of Vitesco. The e-mobility division, which represents around 20% of group sales, will have highly negative margins (-17% to -14%) due to high R&D costs and low volumes. The Bearings and Industrial Solutions division’s profitability is expected to be between 5% and 7%, an improvement from 4.2% in 2024 but still below the 7.6% achieved in 2023.
In November 2024, Schaeffler announced structural measures to enhance its competitiveness in Europe, with a potential savings of €290 million per annum from 2029. Including synergies from the Vitesco acquisition, Schaeffler aims to achieve positive EBIT effects of €815 million annually from 2029. However, the benefits in 2025 and 2026 are expected to be low, with more than half of the total volume becoming effective in 2027.
Schaeffler’s debt amounted to approximately €9.1 billion at the end of 2024. For 2025, the company expects a free cash flow of minus €200 million to zero, after restructuring cash outs but before dividend payments of €236 million. As a result, Schaeffler’s debt is expected to increase further in 2025, resulting in a debt/EBITDA of almost 3.9x.
The Ba1 rating is supported by Schaeffler’s substantial scale, broad product offering, significant synergy potential from the integration of Vitesco, above-average profitability, ability to innovate, and expected strong growth in e-mobility areas. However, factors constraining the rating include exposure to cyclical end markets, pressure on profit margins, execution risks, negative free cash flows at times of low profitability, and exposure to environmental risk.
The stable outlook reflects the expectation that Schaeffler will achieve the benefits expected from the integration of Vitesco, improving profitability and achieving metrics in line with a Ba1 rating within the next 12-18 months. Schaeffler’s liquidity is considered good, underpinned by a €1.3 billion cash balance at the end of 2024, and a €3.0 billion available revolving credit facility maturing in 2029.
Schaeffler could face a downgrade if the combined group’s debt/EBITDA exceeds 3.5x on a sustainable basis or if the EBIT margin fails to recover towards 5%. Conversely, an upgrade could occur if the combined group’s EBIT margin exceeded 7% on a sustained basis, or if debt/EBITDA improved to below 3.0x sustainably.
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