Whey Finance

Research: Rating Action: Moody’s downgrades ams-OSRAM CFR from Ba3 to B1, outlook stable

Frankfurt am Main, September 09, 2022 — Moody’s Investors Service (“Moody’s”) today downgraded the Corporate Family Rating (CFR) and Probability of Default (PDR) rating from ams-OSRAM AG (ams-OSRAM or the Company) to B1 of Ba3 and B1-PD of Ba3-PD. At the same time, Moody’s downgraded the instrument ratings of the €850 million and $450 million senior unsecured secured bonds from Ba3 to B1. The outlook for all ratings changed from negative to stable.

“The downgrade to B1 reflects the slower than expected realization of margin improvements and the associated high leverage for an extended period following the Osram acquisition,” said Dirk Goedde, Vice President of Moody’s and principal analyst for ams-OSRAM. “While we see continued progress in the integration of Osram and the path to margin expansion, the financial metrics are not commensurate with the Ba3 rating category, and we believe the cost pass-through may become difficult in the future,” Mr. Goedde added. “In addition, we see downside risks to end-customer demand amid recent inflationary pressure on discretionary income, which would further hurt profitability,” Goedde continues.

A full list of ratings can be found at the end of this press release.

RATINGS RATIONALE

Since the acquisition of Osram and the implementation of the dominance and profit and loss transfer agreement, ams-OSRAM has made significant integration progress. The vast majority of planned divestitures have either closed or will close in the coming quarters and the company will use the proceeds to reduce gross debt. The company also continues to follow the announced profit optimization plan. However, the realization of all efforts will only become fully effective in 2023/2024. In the trailing twelve months ending June 2022, Moody’s adjusted EBITDA margin was 13.2%, below previous expectations due to slower-than-expected synergy realization, but also recent cost inflation with only some ability to pass on cost increases. We expect an improvement towards 18% by 2023 thanks to both the disposal of loss-making subsidiaries and profit optimization measures. This margin improvement, coupled with the planned reduction in gross debt, will likely lead to a reduction in Moody’s Adjusted Debt/EBITDA from 6.8x at June 2022 LTM to 5.0x by 2023 (adjusted leverage of Moody’s includes Osram’s minority shareholders’ put option). The company announced a major investment in expanding the production footprint, specifically an 8″ wafer fab in Malaysia, which will contribute to future growth but result in slightly negative free cash flow generation in over the next few years in our base case.

More generally, ams-OSRAM AG’s Family of Companies (CFR) B1 rating positively reflects the company’s market-leading position with strong innovation capabilities in the fast-evolving high-sensor market. performance; strong secular market trends in defined end markets, with attractive growth opportunities; the good diversification of the company in terms of products and use cases in all sectors, with the increasing penetration of high performance sensors; and the expected improvement in its EBITDA margin towards 20% in our base scenario. The rating also considers the company’s strong liquidity position positively.

Nonetheless, the rating is limited by its high leverage of 6.8x in the 12 months ending June 2022, which we expect to reduce to 5.0x over the next 12-18 months (adjusted by Moody’s ); execution and integration risks, as well as the uncertainty surrounding the full realization of anticipated cost synergies and the restructuring of the combined group, which are necessary to reduce leverage; the low diversification of the company in terms of end customers and the dependence linked to the development of these end customers; and its strong exposure to highly cyclical end markets, such as automotive and consumer electronics. In light of a more difficult macroeconomic environment, the challenges of executing ams-OSRAM’s performance improvement plan have increased.

The stable outlook reflects that ams-Osram’s margins will be comfortably in the low double-digit percentage range (Moody’s Adjusted EBITA) even in a period of declining demand, thanks to the efficiency measures of the company and the good diversification of its activities. Following the voluntary debt repayment in 2022, the company’s debt/EBITDA will likely be in the 5.0 to 5.5x range (Moody’s adjustment), even in times of weaker consumer confidence and decline in profitability.

LIQUIDITY

ams-OSRAMs liquidity is adequate, supported by approximately €1.4 billion of cash on its balance sheet as of June 2022 and full availability under the existing €800 million revolving credit facility maturing in September 2025. The next major debt maturity is €339 million of maturing convertible bonds and bank facilities maturing in 2022, which the company plans to repay.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

ams-OSRAM’s ratings could be upgraded if (i) the company reduces debt/Moody’s Adjusted EBITDA below 4.0x and (ii) Moody’s Adjusted EBITDA margins approach 20% and (iii) Moody’s Free Cash Flow/Adjusted Debt is consistently above 5% and (iv) maintaining a prudent financial policy, focused on reducing debt and maintaining ample liquidity.

ams-OSRAM’s ratings could be downgraded if (i) Moody’s Adjusted Debt/EBITDA remains persistently above 5.0x or (ii) the company fails to achieve meaningful margin improvements with Adjusted EBITDA margins of Moody’s remaining below 15% or (iii) Moody’s adjusted EBITDA margins cash flow/debt remain negative or (iv) any signs of weakening liquidity.

LIST OF AFFECTED RATINGS

..Issuer: ams-OSRAM AG

Downgrades:

…. LT Corporate Family Rating, downgraded from Ba3 to B1

…. Default rating probability, downgraded to B1-PD from Ba3-PD

….Senior regular unsecured bond/debenture, downgraded from Ba3 to B1

Outlook Actions:

….Outlook, changed to stable from negative

MAIN METHODOLOGY

The main methodology used in these ratings was Semiconductors published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74959. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

COMPANY PROFILE

ams-OSRAM AG (ams-OSRAM) is an Austrian producer of high-performance sensors for the consumer electronics, automotive and healthcare sectors, as well as lighting solutions primarily for the automotive industry. The company operates 26 production sites with approximately 24,700 employees worldwide. In the 12 months to June 2022, ams-OSRAM generated €4.9 billion in revenue.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued without modification as a result of such disclosure.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Dirk Goedde
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
Customer service: 44 20 7772 5454

Christian Hendker, CFA
Associate General Manager
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Customer service: 44 20 7772 5454

Release Office:
Moody’s Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS: 44 20 7772 5456
Customer service: 44 20 7772 5454