ZF Friedrichshafen : A bundle of risks and insufficient yields

ZF developed from an issuer in a benign automotive market (post Covid 19) that can de-lever from monetising material assets and improving its group profitability via the implementation of self-help measures to an issuer that is facing a looming automotive crisis (underlined by a material guidance cut), where the monetisation of ZF Lifetec (formerly named Passive Safety Systems) is unfeasible in the short-term (in our view), denying quick de-leveraging, and where workforce (and certain stakeholders) is standing up against reportedly substantial cost and footprint reduction plans. This all became apparent within some months. Our view on the global automotive market was never rosy in the last two years, but at least a sideways trend was deemed to be possible. Nowadays, we expect headwinds over the next 12-18 months. On top of this could come headwinds from (new) tariffs and protectionism (apparently under way).
The assumed negative rating actions are not a primary driver for us (Moody’s and S&P adopted negative outlooks on the Ba1 and BB+ ratings). But a swift return to IG territory is far away at the moment as the odds of an asset sale, to accelerate the process, worsened.
A general challenge we face is that transparency is still low.
Given the net leverage we expect to see by FYE 24, ZF will in our view be in need to reset the net leverage covenant of the RCF. Typically, companies of ZF’s calibre can achieve a covenant reset without too much objection, we add.
All of this denotes our Negative (vs. Stable) credit opinion. A view, we adopted recently on IHO/Schaeffler, too.
We believe that the recent newsflow in global automotive has not created too much damage, yet. We find that strange and ask us how much of a (prospective) crisis is needed to create more volatility? Lower rated names sold off and names like ZF have experienced mild and gradual spread widening until November 2024 when ZF’s bonds suddenly rallied (in line with the sector). We deem this totally unjustified and what is potentially coming (in global automotive) is not reflected in yields. A 4ish to 5ish yield level for ZF is not high enough in our view. The growth prospects in North America and in Asia are indeed better than in Europe, but the question is also how much of this growth will be applicable to German OEMs and German suppliers?
We adopt Reduce recommendations on the entire ZF curve given inadequate compensation for the bulk of actual and potential risks and investors should make use of the recent rally in the name and de-risk now.