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Derivatives

Continental returns to the big league

Germany’s Continental spent over four years as a high yield credit, although one looked on favourably by investment grade buyers. But now with one triple-B rating, a newly established debt issuance programme and a foothold in the US markets, the tyre company’s drive to return to high grade status is gaining momentum. Nina Flitman finds out how.

Next year, as Brazil hosts the FIFA World Cup, the brightest and best of the world’s footballing talents will line up on a pitch branded with the logo of Germany’s Continental. The tyre maker has sponsored the event since 2006’s tournament in Germany, although its involvement in football dates back to its support of the UEFA Champions League from 1995. 

But while its support of top-flight sport has continued over the years, Continental itself has been relegated from the investment grade leagues of the capital markets. By early 2009 it was downgraded to high yield status. The rating agencies blamed the headwinds faced by the automotive supply market as car makers themselves cut back on production and the sizeable refinancing risk run by Continental following the debt it took out in 2007 to support its €11.4bn takeover of Siemens VDO Automotive.  

But the automotive supplier is steadily making a return to form.  With one foot already in investment grade territory after Fitch upgraded it from BB to BBB in July, Continental is looking forward to a full house of IG ratings.

“We would like to be BBB/BBB+ across the board,” says Stefan Scholz, the group treasurer of the firm in Hannover. “As a public listed automotive supplier it’s not our target to be in the single-A level or higher, as that doesn’t fit with our understanding of a balanced leverage in terms of our WACC and ROCE requirements. We would like to be where we were in 2007, when we acquired Siemens VDO.” 

This return to form has already begun in earnest. At the beginning of 2013, although Continental was officially rated Ba1/BB/BB, the rating agencies had granted the company standalone ratings of Baa2/BBB/BBB. This rating excluded the effect of its 49.9% ownership by B1/B+ rated Schaeffler Group.  

But even aside from its official rating, Continental has long been regarded as an anomaly for its class, and its deals have attracted investors from across the high yield and investment grade sectors. This was evident in its most recent bond transaction — the €750m 3.25% five year deal completed in July was well oversubscribed as investors from both sides of the market snapped up the paper. 

“Investment grade buyers are willing to look at Continental,” says Scholz. “Many invested in the 2018 bonds, and that deal came a week before Fitch announced that we were triple-B. Now that one agency has formally confirmed that we are back at investment grade status we have many more high grade investors open to us. But there are still some restrictions there — some insurance companies and pension funds in Germany are not able to invest without restrictions in a company if only one investment grade rating is available.”

While Continental has not yet officially climbed back to investment grade status from all three agencies, it already enjoys many of the benefits that a high grade rating would bring. It has already debuted in the US dollar market for example, raising $950m of seven year non-call three senior secured notes last September. That deal, which was priced to yield 4.5%, attracted a book of $6.3bn.

Meanwhile, on the back of its €4.5bn refinancing exercise in January 2013 that saw Continental’s lending banks agree to drop a security package from its credit facilities, the firm has been able to re-establish a debt issuance programme. 

A new seven year bond, being marketed at the start of September, is the first issued by Continental with its new investment grade rating from Fitch. 

But the borrower’s ambition does not just end with a return to investment grade status. Continental wants to get back to where it was before the VDO Siemens Automotive acquisition. Back then, some 40% of sales came from the non-original equipment manufacturer sector, but now more than 70% of total sales relate to the original equipment manufacturing division. Scholz says that the firm is in good shape to initiate its shift in focus through acquisitions.

“Continental feels comfortable enough to consider some bigger acquisitions for non-organic growth, especially in the non-original equipment manufacturer sector,” says Scholz. “We now have sound financial ratios — a leverage ratio of around one, gearing ratio in the area of 60%-70% — and this gives us more opportunities to think about what can be added to Continental’s business portfolio.”

By the time the first whistle is blown in São Paulo in June next year, Continental may be a very different borrower —solidly investment grade, financially flexible and with some new acquisitions under its belt.  

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