Siemens Financieringsmaatschappij N.V. -- Moody's changes the outlook on Siemens to negative; affirms its A1/P-1
Rating Action: Moody's changes the outlook on Siemens to negative; affirms its A1/P-1
Global Credit Research - 05 Aug 2020
Frankfurt am Main, August 05, 2020 -- Moody's Investors Service, ("Moody's") has today changed the outlook on Siemens Aktiengesellschaft (Siemens), as well as its guaranteed subsidiaries, to negative from stable. Concurrently, Moody's has affirmed all the ratings of Siemens as well as its guaranteed subsidiaries, including Siemens' A1 long term issuer rating and its P-1 commercial paper rating. The full list of all affected entities and the ratings are in the end of the press release.
RATINGS RATIONALE
Today's rating action has been triggered by Siemens Healthineers AG (SH) announcing its intention to acquire 100% stake in the U.S. healthcare company Varian Medical Systems for a purchase price of around USD16.4 billion. The acquisition is expected to be financed by a combination of roughly 50% equity increase at SH level and a roughly 50% of debt financing. Siemens will not participate in the planned equity increase, which will result in a dilution of its stake in SH to 72% from 85%. The debt capital for the acquisition is expected to be borrowed externally at the level of Siemens with a bridge loan of up to two years, which will be refinanced with USD bonds and transferred to SH via intragroup loans. The transaction is still subject to Varian's shareholders' approval as well as regulatory approvals and SH expects it to close in the first half of 2021.
The affirmation of Siemens' rating reflects the good market positions of the company's core divisions, diversification and cash generation ability of Siemens as well as a financial policy, which is committed to maintain a leverage and a rating in the current rating category. While Moody's acknowledges the strategic rationale of the acquisition to strengthen the market position and growth of SH in the field of oncology diagnostics and treatment, the outlook reflects weakened credit metrics as well as the integration and execution challenges linked to the acquisition.
Moody's estimates that Varian's EBITDA, as adjusted by Moody's, was roughly USD600 million in 2019, implying a valuation which factors in SH's expectation of further medium term growth of the acquired business as well as synergies between both businesses. As a result of the acquisition, on a pro-forma basis Siemens' gross leverage, as adjusted by Moody's, would increase by roughly half a turn from around 2.8x for the 12 months ending March 2020, which is the agency's estimate of the leverage based on Siemens' continuing operations only (i.e. without the contribution from Siemens Energy that Siemens intends to spin-off later this year). Such a relatively high increase in leverage comes when Siemens's performance is negatively affected by coronavirus pandemics and the company does not have a substantial capacity for leveraging at the current rating level, which builds a pressure on its ratings.
However, the rating agency believes that the acquisition of Varian will improve the business profile of Siemens as well as SH, thus partially offsetting the initial increased leverage in connection with the acquisition. Being a market leader in a number of countries, between 2017 and 2019 Varian achieved a healthy reported operating margin between 15% and 17%, which is above Siemens' average margin, operating in a market with a fairly attractive growth potential above GDP growth and high barriers to entry. In addition, SH's management expects that the combination of the businesses will deliver revenues and cost synergies of above EUR300 million by 2025.
Today's affirmation of the ratings also reflects Siemens' commitment to maintain its A1 issuer rating. While the transaction will position Siemens weakly in the A1 rating category, Moody's believes that Siemens will be willing and able to take steps to restore its leverage back to the levels commensurate with the A1 rating by the end of 2022, such Moody's adjusted debt/EBTDA below 2.5x. These steps could include a reduction of debt from a monetization of various assets, an acceleration of already announced costs savings, but also a reduction in the pace of share buybacks or dividends.
However, the deleveraging path is also contingent upon Siemens' key markets returning to a growth trajectory in 2021 and 2022, broadly in line with Siemens medium term growth ambitions, and there is currently still a high uncertainty about the degree of the economic recovery in the next two years. In addition, there is an execution risk related to the planned spin-off the Siemens Energy business, a successful share increase at SH level, but also Siemens' ability to monetize its assets on attractive terms to restore its leverage. All these uncertainties are reflected in the negative outlook.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could change the rating down if (1) Moody's gets evidence of a sustained erosion in Siemens' competitive strength, profitability and cash flow generation or the management implements a more aggressive financial policy; (2) integration and growth execution of the acquired business fails to materialize; (3) Siemens fails to clearly reduce its adjusted gross debt / EBITDA towards 2.5x during 2022 or if its free cash flow remains negative for an extended period; (4) Siemens' financial policy shifts towards a higher permanent financial leverage, either through additional debt-funded acquisitions or share buybacks exceeding free cash flow generation; and (5) EBITA margin meaningfully decreases below 10%, respectively 12% after the deconsolidation of the Gas & Power division.
Moody's could change the rating up if (1) competitive pressures eases and Siemens benefits from revenue growth throughout its broad operations, while the company maintains its prudent financial policy; (2) EBITA margins sustainably exceeds 13%, respectively 15% after the deconsolidation of the Siemens Energy; and (3) Siemens' adjusted gross debt / EBITDA declines sustainably below 1.5x, accompanied by strong liquidity.
LIST OF AFFECTED RATINGS:
..Issuer: Siemens Aktiengesellschaft
Affirmations:
.... LT Issuer Rating, Affirmed A1
.... ST Issuer Rating, Affirmed P-1
....Commercial Paper, Affirmed P-1
....Other Short Term, Affirmed (P)P-1
....Senior Unsecured Medium-Term Note Program, Affirmed (P)A1
Outlook Actions:
....Outlook, Changed To Negative From Stable
..Issuer: Siemens Capital Company, LLC
Affirmations:
....BACKED Commercial Paper, Affirmed P-1
....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)A1
....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed A1
Outlook Actions:
....Outlook, Changed To Negative From Stable
..Issuer: Siemens Financieringsmaatschappij N.V.
Affirmations:
....BACKED Commercial Paper, Affirmed P-1
....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)A1
....BACKED Other Short Term, Affirmed (P)P-1
....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed A1
Outlook Actions:
....Outlook, Changed To Negative From Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
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.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
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.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Martin Fujerik Vice President - Senior Analyst 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 Christian Hendker, CFA 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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