Rating Action: Moody's confirms Adler Pelzer's B3 rating; outlook stable
Global Credit Research - 02 Sep 2020
Frankfurt am Main, September 02, 2020 -- Moody's Investors Service, ("Moody's") has today confirmed the B3 corporate family rating (CFR) and senior secured instrument ratings of Adler Pelzer Holding GmbH (Adler Pelzer, or the group). Concurrently, Moody's has confirmed the probability of default rating (PDR) of B3-PD. The outlook on the ratings has been changed to stable from ratings under review.
This rating action concludes the review for downgrade process, which was initiated on July 23, 2020.
"The rating confirmation reflects the company's publication of 2019 audited financial statements and the current operating performance, which have been in line with expectations for the B3." said Matthias Heck, a Moody's Vice President -- Senior Credit Officer and Lead Analyst for Adler Pelzer. "The stable outlook reflects the expectation that the company will maintain adequate liquidity and be able to sustain leverage and margin metrics required for the B3, despite the ongoing challenging sector environment in the automotive industry." added Mr. Heck.
On August 14, 2020, Adler Pelzer published its 2019 audited financial statements with an unqualified audit statement. The previous review process was driven by the delayed publication, well beyond the 120 days timeline set by the covenants of the company's notes due 2024. On a Moody's adjusted basis, Adler Pelzer's EBITA margins declined to 4.2% in 2019, from 5.6% in 2018. Concurrently, its debt/EBITDA increased to 5.0x in 2019, from 3.8x in 2018.
The company has also internally approved a revised forecast 2020-2024, which takes into consideration the clouded sector environment which Adler Pelzer expects to balance with certain cost efficiency measures, increasing the flexibility in its workforce and reductions of capital expenditures. The company also evaluates options to further secure cash levels. On this basis, the Sole Director of the Company believes that the group has sufficient cash for the next twelve months.
Moody's expects that the company will suffer materially from the global coronavirus outbreak, with revenues declining by around 20% in 2020, before recovering by around 10-15% in 2021. Despite the recovery, Adler Pelzer's revenues will remain below levels of E1.4 billion to E1.5 billion seen in the last three years. Moody's expects a drop in the company's margins (Moody's adjusted EBITA) to below 4% in 2020, before recovering to around 4% in 2021. The lower revenues and profitability will also weigh on the group's leverage, which Moody's expects to increase to around 6x in 2020, from 5.0x at December 2019. With a recovery on 2021, Adler Pelzer's leverage should improve but stay at still elevated levels of around 5x-6x in 2021. Both, leverage and margins are commensurate with a B3 rating.
The B3 corporate family rating (CFR) reflects as positives the company's: (a) well established position as a leading automotive supplier of products for noise, vibration and harmonics (NVH) applications in light passenger vehicles; (b) long-term and well-established relationships with a diverse mix of original equipment manufacturers (OEMs); (c) history of revenue growth in excess of global light vehicle production; (d) positive exposure to the trend towards electrified vehicles; (e) a general commitment of the main shareholder to support the company if needed.
Nevertheless, the rating also reflects as negatives the company's: (a) relatively small size -- revenue in 2019 amounted to around E1.4 billion; (b) exposure to a changes in commodity prices; (c) exposure to the cyclicality of the automotive industry which currently faces a number of headwinds; (d) negative free cash flow generation, driven by growth investments, and (e) elevated financial leverage, with Moody's adjusted debt/EBITDA of 5.0x as of December 2019, which is expected to increase further.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects the expectation that the group will be able to sustain leverage and margin metrics required for the B3, despite the adverse impact that the global coronavirus outbreak will have on Adler Pelzer's operating performance and credit metrics at least into 2021. More specifically, Moody's expects EBITA margins (Moody's adjusted) of 3%-4% in 2020 and 2021, and leverage of 5x-6x debt/EBITDA (Moody's adjusted). In 2020, Moody's expects metrics to be at the weak end of the ranges, and the expected recovery in 2021 should improve both metrics to the strong end. The stable outlook also reflects the expectation that the company will successfully refinance its short-term debt maturities, and at least maintain its current level of liquidity.
Moody's assesses Adler Pelzer's liquidity profile as merely adequate. The group's primary liquidity sources are internal and include (i) the cash balance of E146 million as of December 2019, which eroded to E113.7 million at the end of June 2020 (on a preliminary basis) and which we understand is unrestricted, and (ii) annual funds from operations (FFO) of around E40-50 million in Moody's stress case.
Adler Pelzer's main liquidity uses include high short-term bank borrowings of E91 million at the end of 2019, and estimated capital expenditure of around E25 million per year. Moody's understands that the company is not planning to pay any dividends to its shareholders. Moody's assumes around E40 million of working cash (3% of revenues), which is tied up to run the business.
Overall, the company is exposed to the cyclicality of the automotive industry and the current disruption in production due to the global coronavirus outbreak. This could further weigh on Adler Pelzer's ability to generate positive free cash flows and weaken its liquidity accordingly. At the same time, a successful refinancing of short-term debt maturities would improve the company's liquidity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the current market situation we do not anticipate any short term positive rating pressure for Adler Pelzer. A stabilization of the market situation leading to a recovery in metrics to pre-outbreak levels could lead to positive rating pressure. More specifically adjusted Debt/EBITDA would have to drop back sustainably below 5x with an EBITA margin sustainably above 4%.
Further negative pressure would build if Adler Pelzer fails to return to meaningful operating profit generation of the second half of 2020 allowing it to stabilize its liquidity situation. A prolonged and deeper slump in demand than currently anticipated leading to more balance sheet deterioration and a longer path to restoring credit metrics in line with a B3 credit rating (EBITA margin at least 3%, debt/EBITDA 6x) could also lead to further negative pressure on the rating.
The principal methodology used in these ratings was Automotive Supplier Methodology published in January 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1170606. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Adler Pelzer Holding GmbH (Adler Pelzer) is a global automotive supplier headquartered in Hagen, Germany. Adler Pelzer is a global leader in the design, engineering and manufacturing of acoustic and thermal components and systems for light passenger vehicles. Its largest product family is for passenger compartments, which includes floor trim, door shields, seals and felt and foam insulation parts. Adler Pelzer also produces panels and trims for the engine compartment and the trunk. In 2019, the group generated revenue of E1.4 billion and EBITDA of around E129 million (as defined and reported by the company, including IFRS16). Adler Pelzer is a wholly owned subsidiary of Adler Group S.p.A. which is controlled by Adler Plastic S.p.A., which owns 71.93% of the Company, and FSI SGR SpA, which bought a share of 28.07% in May 2018.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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Matthias Heck, CFA VP - Senior Credit Officer Corporate Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Anke Rindermann Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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