ZF Friedrichshafen : Self-help measures show effect, but the story remains complicated

The H1 25 results were not strong, but could have been much worse. The key positive was the expansion of adj. EBIT in absolute terms and the margin improvement, underlining the hope that ZF’s self-help measures are coming through. The other positive factor is ZF’s good liquidity situation after EUR and USD debt issuances during FY 25. The PF liquidity buffer reached c. EUR 9.3bn (before the effects from the recent tender); c. EUR 6.9bn after the tender and 2025 maturities. The downer of the earnings print was ZF’s additional covenant reset, setting the ceiling at 4.75x vs. prior 4.0x. We warned of this in an earlier publication, but did not expect to see this so quick. ZF guided also for lower revenue, but it confirmed the margin corridor and adj. FCF guidance. The structural weak transparency creates still headaches for us and let us refrain from providing full-fledged projections (except for some rough rating sensitivities). A big surprise was the replacement of CEO Dr. Holger Klein and another management board change – ZF stays in the limelight.
We affirm our Negative Credit Opinion given tariffs, industry and potential rating headwinds, no access to equity markets and – apparently – no chance to monetise assets, albeit over the medium-term, some asset sales/partnerships shall be possible. An asset sale or partnership resulting in material net proceeds is still the greatest potential catalyst for the entire curve. The latest USD bond issuance was massively upsized and primary market activity met great interest YTD. Rating risk remains and we are certain that Moody’s will downgrade ZF to Ba2. We affirm our Buy recommendations for the bonds due over 2027-2028, given the good liquidity headroom. There is a price risk via a clean-up call for the 5.750% 2026 notes post tender.
Our recommendations:
ZFFNGR 3.000% 2025: No reco (redeemed on 21 September 2025)
ZFFNGR 2.000% 2026: Neutral (vs. Buy)
ZFFNGR 5.750% 2026: Reduce (vs. Buy)
ZFFNGR 2.000% 2027: Buy (affirmed)
ZFFNGR 2.750% 2027: Buy (affirmed)
ZFFNGR 2.500% 2027: Buy (affirmed)
ZFFNGR 2.250% 2028: Buy (affirmed)
ZFFNGR 3.750% 2028: Buy (affirmed)
ZFFNGR 4.750% 2029: Neutral (affirmed)
ZFFNGR 6.125% 2029: Neutral (affirmed)
ZFFNGR 3.000% 2029: Neutral (affirmed)
ZFFNGR 7.000% 2030: Neutral (new)