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Rating action

Scope Ratings GmbH (Scope) has affirmed its issuer ratings of BBB-/Stable on Germany-based Franz Haniel & Cie. GmbH and its financing subsidiary Haniel Finance GmbH. Scope has also affirmed the senior unsecured debt ratings at BBB- and the short-term debt ratings at S-2.

Rating rationale

Haniel’s rating reflects the continued execution of its finely tuned investment strategy, which focuses on investments in controlling stakes of mature SMEs. More specifically, these investments need to match a business purpose that is in line with Haniel’s ‘People, Planet, Progress’ strategy. The strategy centres on companies/investments that serve global and sustainable megatrends in the areas of: i) health and wellbeing; ii) the circular economy; iii) climate change; and iv) robotics and automation (ESG factor, which is likely to support a sustained business profile). The most recent investments have been in BauWatch (February 2021), KMK Kinderzimmer (December 2021), Emma, Gilde Healthcare V growth capital fund (both 2020).

The ongoing portfolio development, with twelve investments as of April 2022, has immediately improved gross asset value (+5% at the end of 2021, year-on-year) and provided exposure to a higher number of industries with only a limited correlation. The new 60% investment in KMK (provider of early childhood education) has mitigated the reduction in Haniel’s Metro stake (2.7% as at 2021), which is no longer a core investment and has accordingly been moved to ‘other investments’.

At the same time, the effect on diversification among dividend- and income-generating assets remains subdued. The Covid-19 crisis further limited Haniel’s income diversity in 2020 as portfolio companies cut shareholder payouts in order to preserve cash. In addition, new investments Emma, BauWatch and KMK have not reached dividend status yet. Thus, Haniel’s significant dividend income growth of 20% in 2021 was once again limited to its mature investments, helped by the strong special dividend contribution from Takkt. Scope is confident that Haniel’s dividend diversity will gradually strengthen over the longer term, thanks to its large investment headroom. Nevertheless, income concentration is likely to be high in the medium term, as Scope’s conservative base case assumes no dividends from the new investments until after 2024.

Scope expects both Ceconomy and Bekaert to resume dividend payments in 2022. Scope highlights the Haniel portfolio’s dependence on CWS performing well for the next few years, given the agency’s assumption of no immediate dividends from the new investments. Although the further sale of Metro shares and ELG has significantly reduced portfolio liquidity and fungibility, Scope notes that sales proceeds have been able to mitigate Haniel’s heightened investment activity in 2021 (new participations, purchase of additional Takkt shares as well as internal financings). Scope continues to attach less importance to Haniel’s reduced exposure to liquid/listed portfolio companies as long as there is sufficient visibility that the company will not need to sell assets, given a sustained sufficient total cost coverage and adequate liquidity profile.

Haniel’s credit strength is underpinned by a strong total recurring cost coverage of 1.5x in 2021 – a year that was largely characterised by strong dividend income and heavy investment activity. Scope forecasts that Haniel will retain full cost coverage over the next three years. The total cost coverage ratio should again normalise in the 1.0x-1.3x range, which supports the credit rating. While 2021 was unilaterally strong on the income side, Scope expects the holding company’s costs, especially on the shareholder remuneration side, to follow suit in the current year. Resumed dividend payouts from Ceconomy and smaller portfolio ventures could provide some further upside. Scope believes that Haniel is likely to balance higher income from portfolio companies with shareholder remuneration, such as dividend payouts to its own shareholders and share buybacks that are in line with growing portfolio income. This is likely to be partly mitigated by reduced operating holding company costs (salaries and overheads), which peaked in 2020 and are now – following restructuring – expected to fall.

Haniel’s indebtedness is still very comfortable, with a low Scope-adjusted loan/value ratio of about 10% at YE 2021. Although the ratio has climbed from the 3% reached in 2020, due to Haniel’s intense, partly debt-funded investment activity, it is still within the limits of its investment grade rating and supported by the continued value appreciation of Haniel’s portfolio market value to EUR 6bn (up from EUR 5.5bn at YE 2020). The holding company’s low net debt exposure affords large headroom for additional debt, which can be used for portfolio additions or to support portfolio companies through cash injections funded at the holding company level. In light of Haniel’s proven slow portfolio ramp-up, Scope anticipates no major changes to portfolio market gearing. Scope calculates that Haniel retains significant headroom of about EUR 1.4bn firepower after the recent acquisition of BauWatch and KMK. This headroom could be used for further portfolio developments before reaching the publicly communicated net debt ceiling of EUR 1bn. The rating reflects Scope’s expectation of Haniel being able to keep total recurring costs covered by recurring income of at par at least based on management’s investment grade commitment as well as on the respective positive track record achieved to date. The holding company’s relative indebtedness remains strongly exposed to market volatility via fluctuating share prices and moving multiples used for valuating non-listed portfolio companies. Therefore, Haniel’s portfolio market value would have to deteriorate by 35% before reaching a Scope-adjusted loan/value ratio of 25%. As such, Haniel’s financial position remains strong, as expected for its investment grade rating.

Haniel’s liquidity continues to be strong. Following the full redemption of the EUR 500m exchangeable bond in 2020, the holding company faces debt repayments adding up to about EUR 520m over the next three years (EUR 464m in 2022, around EUR 30m in 2023 and around EUR 20m in 2024). Most of this is related to short-term bank loans and commercial paper for the new acquisitions but also to the shareholder loan from Haniel family members. Incorporating an expected total coverage of above 1.0x over the medium term and an undrawn amount of EUR 755m from committed multi-year credit facilities, these maturities are comfortably covered with no real refinancing risks that would necessitate the sale of any shareholdings.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

Scope maintains the Stable rating Outlook, reflecting the agency’s expectations that Haniel will keep total cost coverage within a range of 1.0-1.3x on a sustained basis. This implies that cash contributions from portfolio companies would have to fall short of Scope’s forecasts by 13%-23% for recurring cash inflow to be unable to fully cover recurring holding company costs, including expected shareholder remuneration (i.e. before total cost coverage drops to below 1.0x).

A positive rating action could be warranted if Scope expects total cost coverage of above 1.3x on a sustained basis, also bolstered by a more granular recurring cash inflow from portfolio companies. This could be the result of a more granular investment portfolio with dividend payments or profit sharing from more than the strongest three ventures at present.

A negative rating action could result if Haniel exceeds its communicated net debt target, without offsetting this through additional dividend streams from new investee companies, or if Scope expects total cost coverage to deteriorate to a level below 1.0x.

Long-term and short-term debt ratings

Haniel’s financing subsidiary Haniel Finance Deutschland GmbH does not have outstanding public debt at present.

Long-term debt issued by either or Franz Haniel & Cie. GmbH or Haniel Finance Deutschland GmbH is affirmed at BBB-, the level of the issuer rating.

Haniel’s short-term rating is affirmed at S-2. This reflects Scope’s view on the company’s robust liquidity profile, incorporating internal and external liquidity sources. It also reflects Haniel’s good standing in public and private debt markets, and well-established banking relationships, partly evidenced by the broad mix of committed long-term credit lines from different banks.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Corporate Rating Methodology, 6 July 2021), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Olaf Tölke, Managing Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Franz Haniel & Cie GmbH Issuer Credit Rating/Outlook was first released by Scope Ratings on 23 February 2016. The Credit Rating/Outlook was last updated on 26 April 2021.
The Franz Haniel & Cie GmbH short-term Credit Rating and Senior unsecured debt Credit Rating were first released by Scope Ratings on 21 February 2017. The Credit Ratings were last updated on 26 April 2021.
Haniel Finance Deutschland GmbH Issuer Credit Rating/Outlook was first released by Scope Ratings on 24 February 2017. The Credit Rating/Outlook was last updated on 26 April 2021.
Haniel Finance Deutschland GmbH short-term Credit Rating and Senior unsecured debt Credit Rating were first released by Scope Ratings on 27 June 2018. The Credit Ratings were last updated on 26 April 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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