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Published by Gbaf News
Posted on June 28, 2018
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The rating affirmation reflects Scope’s continued view on Haniel’s consistent execution of its investment strategy which has resulted in increased portfolio diversification and more robust income streams without burdening the company’s indebtedness.
Rating Rationale
Scope Ratings affirms its issuer ratings of BBB- on Germany-based Franz Haniel & Cie. GmbH and its financing subsidiary Haniel Finance Deutschland GmbH. The rating Outlook remains Stable. The short-term rating is affirmed at S-2. Senior unsecured debt is affirmed at BBB-.
Scope acknowledges Haniel’s ongoing portfolio rebalancing with regard to reduced concentration risks associated with portfolio market value and dividend/interest streams. Following the new investments, but also the demerger of METRO in 2017, and a portfolio now comprising eight shareholdings, Haniel’s largest investment now makes up around 25% of the overall portfolio (as per 31 Dec 2017) as compared to 40% when Scope initially rated Haniel in 2016. However, Scope notes that the portfolio may change quickly, particularly due to sizable share price movements of Haniel’s larger shareholdings (e.g. CECONOMY and METRO have lost about one third of their market capitalisation since the beginning of the year, primarily on market concerns over their Russia exposure).
More importantly, Scope points out that dividend streams are growing increasingly resilient to potential earnings disruptions at one of Haniel’s portfolio companies, with CWS-boco incl. the acquired parts of Rentokil Initial expected to become the largest dividend-paying entity. Scope’s rating case reflects a concentration for the largest dividend payer of around 35% over the next 2.5 years. This level can be expected to fall further if Haniel exploits its remaining financing headroom for additional ventures.
Major uncertainties now rank around the future dividend payments of CECONOMY following large envisaged impairments for the current business year. While the portfolio company has guided to pay out 45%-55% of normalised EPS, Scope takes a conservative stance which leads to increasing concentration risks from the largest dividend-paying shareholding towards 40% in the next years.
Scope’s view on Haniel’s financial risk profile has become more positive due to the holding’s improved cash inflow and cost profile. While the company’s leverage – measured as the LTV – remains vulnerable to major value disruptions in Haniel’s core assets, we believe that total cost coverage is likely to stand at around 1.3x on a sustainable basis, despite higher anticipated dividend distributions to Haniel’s shareholders, continued share buybacks and higher uncertainties around future dividend streams from CECONOMY.
Scope’s rating case now reflects a sustained full cost coverage at the holding level of around 1.3x. Scope calculates that expected dividend income at the holding level could fall short by 20% before threatening full cost coverage (total cost cover = 1.0x) against our rating case. Given the continuously supportive environment for Haniel’s core dividend-paying investments, Scope is confident that Haniel should have sufficient headroom against a situation without full cost coverage as in 2013/14 when METRO AG did not pay out any dividends.
Scope notes that the most recent portfolio additions have been financed through asset swaps (cash and financial assets) without any major debt funding. Haniel’s LTV (Scope-adjusted debt/net asset value) stood at a comfortable 17% at YE 2017. However, Scope acknowledges that Haniel’s leverage remains volatile in nature. Haniel’s communicated net debt ceiling of EUR 1bn affords the company further potential to raise additional debt. Whereas net financial debt already reached EUR 1.1bn at YE 2017, Scope calculates additional debt potential of another EUR 800m, thereby reflecting Haniel’s financial assets (financial assets including short-to-medium term shareholder loans to portfolio companies). As Haniel is likely to screen the market for further portfolio additions and execute other relatively small deals, particularly towards 2020 when additional debt potential could be released from the conversion of the exchangeable bond, we believe that in the short term the holding will focus more on integrating its most recent portfolio additions.
Haniel’s liquidity profile is considered as robust. Liquidity ratios stand above 110% on a sustainable basis. Following the latest repayment of the EUR 200m corporate bond in February 2018, the company only bears the burden of i) its exchangeable bond, ii) drawn debt from its credit facilities and commercial paper programme and iii) shareholder loans, totalling around EUR 950m. Given the company’s headroom on its financial debt, the access to various undrawn, committed credit lines with a volume of more than EUR 650m at YE 2017 and positive expected discretionary cash flows, Haniel is expected to comfortably cover upcoming debt maturities over the next 2.5 years.
In light of the expected full total cost coverage, Haniel’s good standing in the public and private debt capital markets and well-established banking relationships – evidenced in part by the broad mix of committed long-term credit lines from different banks – Scope affirms the S-2 short-term rating for the holding’s EUR 500m commercial paper programme.
Key Rating Drivers
Positive
- Buy-and-hold investment approach with primary focus on recurring dividend streams
- Portfolio companies which are largely market leaders in their respective industries and with well-established business models in mature markets
- Ongoing rebalancing of investment portfolio in line with investment strategy, bolstered by current liquidity, good access to unused, committed credit lines and further debt headroom
- Balanced industry allocation in the investment portfolio, which contains uncorrelated exposure to non-cyclical and cyclical industries
- Strong geographical diversification across revenue streams in the investment portfolio
- Commitment to keeping net debt up to EUR 1bn over the medium-to-long term, even after new investments
- Total cost coverage sustainably above 1.0x and expected to stand at around 1.3x over the next few years
- Strong liquidity and limited short-term refinancing needs, allowing for substantial acquisitions
Negative
- Number of shareholdings remains limited (eight) resulting in high concentration risks within shareholdings in terms of dividend and net asset value concentration
- Limited asset liquidity due to large share of unlisted subsidiaries which may not be sold immediately if liquidity is urgently needed. This is partly offset by the buy-and-hold investment approach and Haniel’s comfortable liquidity position
- Increased focus on SMEs resulting in stronger earnings volatility, partly offset by improved diversification
- Volatile leverage (LTV) stemming from market volatility
- Uncertainties around future dividend payments at CECONOMY
Rating Outlook
Scope maintains the Stable rating Outlook. While Scope expects that Haniel’s total cost coverage can be kept at around 1.3x over the next 2.5 years even including a more conservative stance on dividend streams from CECONOMY, which would trigger a positive rating action, we remain conservative until we have further guidance on this.
A rating upgrade could be warranted if our expectations regarding total cost coverage of above 1.3x are met on a sustainable basis, and if concentration risks in the portfolio are reduced as expected.
A negative rating action could result if the holding company exceeds its communicated net debt target, without offsetting this through additional dividend streams from new investee companies, or if total cost coverage is expected to deteriorate to a level below 1.0x.
The rating affirmation reflects Scope’s continued view on Haniel’s consistent execution of its investment strategy which has resulted in increased portfolio diversification and more robust income streams without burdening the company’s indebtedness.
Rating Rationale
Scope Ratings affirms its issuer ratings of BBB- on Germany-based Franz Haniel & Cie. GmbH and its financing subsidiary Haniel Finance Deutschland GmbH. The rating Outlook remains Stable. The short-term rating is affirmed at S-2. Senior unsecured debt is affirmed at BBB-.
Scope acknowledges Haniel’s ongoing portfolio rebalancing with regard to reduced concentration risks associated with portfolio market value and dividend/interest streams. Following the new investments, but also the demerger of METRO in 2017, and a portfolio now comprising eight shareholdings, Haniel’s largest investment now makes up around 25% of the overall portfolio (as per 31 Dec 2017) as compared to 40% when Scope initially rated Haniel in 2016. However, Scope notes that the portfolio may change quickly, particularly due to sizable share price movements of Haniel’s larger shareholdings (e.g. CECONOMY and METRO have lost about one third of their market capitalisation since the beginning of the year, primarily on market concerns over their Russia exposure).
More importantly, Scope points out that dividend streams are growing increasingly resilient to potential earnings disruptions at one of Haniel’s portfolio companies, with CWS-boco incl. the acquired parts of Rentokil Initial expected to become the largest dividend-paying entity. Scope’s rating case reflects a concentration for the largest dividend payer of around 35% over the next 2.5 years. This level can be expected to fall further if Haniel exploits its remaining financing headroom for additional ventures.
Major uncertainties now rank around the future dividend payments of CECONOMY following large envisaged impairments for the current business year. While the portfolio company has guided to pay out 45%-55% of normalised EPS, Scope takes a conservative stance which leads to increasing concentration risks from the largest dividend-paying shareholding towards 40% in the next years.
Scope’s view on Haniel’s financial risk profile has become more positive due to the holding’s improved cash inflow and cost profile. While the company’s leverage – measured as the LTV – remains vulnerable to major value disruptions in Haniel’s core assets, we believe that total cost coverage is likely to stand at around 1.3x on a sustainable basis, despite higher anticipated dividend distributions to Haniel’s shareholders, continued share buybacks and higher uncertainties around future dividend streams from CECONOMY.
Scope’s rating case now reflects a sustained full cost coverage at the holding level of around 1.3x. Scope calculates that expected dividend income at the holding level could fall short by 20% before threatening full cost coverage (total cost cover = 1.0x) against our rating case. Given the continuously supportive environment for Haniel’s core dividend-paying investments, Scope is confident that Haniel should have sufficient headroom against a situation without full cost coverage as in 2013/14 when METRO AG did not pay out any dividends.
Scope notes that the most recent portfolio additions have been financed through asset swaps (cash and financial assets) without any major debt funding. Haniel’s LTV (Scope-adjusted debt/net asset value) stood at a comfortable 17% at YE 2017. However, Scope acknowledges that Haniel’s leverage remains volatile in nature. Haniel’s communicated net debt ceiling of EUR 1bn affords the company further potential to raise additional debt. Whereas net financial debt already reached EUR 1.1bn at YE 2017, Scope calculates additional debt potential of another EUR 800m, thereby reflecting Haniel’s financial assets (financial assets including short-to-medium term shareholder loans to portfolio companies). As Haniel is likely to screen the market for further portfolio additions and execute other relatively small deals, particularly towards 2020 when additional debt potential could be released from the conversion of the exchangeable bond, we believe that in the short term the holding will focus more on integrating its most recent portfolio additions.
Haniel’s liquidity profile is considered as robust. Liquidity ratios stand above 110% on a sustainable basis. Following the latest repayment of the EUR 200m corporate bond in February 2018, the company only bears the burden of i) its exchangeable bond, ii) drawn debt from its credit facilities and commercial paper programme and iii) shareholder loans, totalling around EUR 950m. Given the company’s headroom on its financial debt, the access to various undrawn, committed credit lines with a volume of more than EUR 650m at YE 2017 and positive expected discretionary cash flows, Haniel is expected to comfortably cover upcoming debt maturities over the next 2.5 years.
In light of the expected full total cost coverage, Haniel’s good standing in the public and private debt capital markets and well-established banking relationships – evidenced in part by the broad mix of committed long-term credit lines from different banks – Scope affirms the S-2 short-term rating for the holding’s EUR 500m commercial paper programme.
Key Rating Drivers
Positive
- Buy-and-hold investment approach with primary focus on recurring dividend streams
- Portfolio companies which are largely market leaders in their respective industries and with well-established business models in mature markets
- Ongoing rebalancing of investment portfolio in line with investment strategy, bolstered by current liquidity, good access to unused, committed credit lines and further debt headroom
- Balanced industry allocation in the investment portfolio, which contains uncorrelated exposure to non-cyclical and cyclical industries
- Strong geographical diversification across revenue streams in the investment portfolio
- Commitment to keeping net debt up to EUR 1bn over the medium-to-long term, even after new investments
- Total cost coverage sustainably above 1.0x and expected to stand at around 1.3x over the next few years
- Strong liquidity and limited short-term refinancing needs, allowing for substantial acquisitions
Negative
- Number of shareholdings remains limited (eight) resulting in high concentration risks within shareholdings in terms of dividend and net asset value concentration
- Limited asset liquidity due to large share of unlisted subsidiaries which may not be sold immediately if liquidity is urgently needed. This is partly offset by the buy-and-hold investment approach and Haniel’s comfortable liquidity position
- Increased focus on SMEs resulting in stronger earnings volatility, partly offset by improved diversification
- Volatile leverage (LTV) stemming from market volatility
- Uncertainties around future dividend payments at CECONOMY
Rating Outlook
Scope maintains the Stable rating Outlook. While Scope expects that Haniel’s total cost coverage can be kept at around 1.3x over the next 2.5 years even including a more conservative stance on dividend streams from CECONOMY, which would trigger a positive rating action, we remain conservative until we have further guidance on this.
A rating upgrade could be warranted if our expectations regarding total cost coverage of above 1.3x are met on a sustainable basis, and if concentration risks in the portfolio are reduced as expected.
A negative rating action could result if the holding company exceeds its communicated net debt target, without offsetting this through additional dividend streams from new investee companies, or if total cost coverage is expected to deteriorate to a level below 1.0x.