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.
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
- 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
- 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
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.
Airbus CEO urges trade war ceasefire, easing of COVID travel bans
By Tim Hepher
PARIS (Reuters) – The head of European planemaker Airbus called on Saturday for a “ceasefire” in a transatlantic trade war over aircraft subsidies, saying tit-for-tat tariffs on planes and other goods had aggravated damage from the COVID-19 crisis.
Washington progressively imposed import duties of 15% on Airbus jets from 2019 after a prolonged dispute at the World Trade Organization, and the EU responded with matching tariffs on Boeing jets a year later. Wine, whisky and other goods are also affected.
“This dispute, which is now an old dispute, has put us in a lose-lose situation,” Airbus Chief Executive Guillaume Faury said in a radio interview.
“We have ended up in a situation where wisdom would normally dictate that we have a ceasefire and resolve this conflict,” he told France Inter.
Boeing was not immediately available for comment.
Brazil, which has waged separate battles with Canada over subsidies for smaller regional jets, on Thursday dropped its own complaint against Ottawa and called for a global peace deal between producing nations on support for aerospace.
Faury said the dispute with Boeing was particularly damaging during the COVID-19 pandemic, which has badly hit air travel and led to travel restrictions or border closures. He expressed particular concern about widening bans within Europe.
“We are extremely frustrated by the barriers that restrict personal movement and it is almost impossible today to travel in Europe by plane, even domestically,” he said.
“The priority no. 1 for countries in general is to reopen frontiers and allow people to travel on the basis of tests and then eventually vaccinations.”
The comments come as businesses increase pressure on governments to reopen economies as coronavirus vaccine roll-outs gather pace across Europe.
France has defended recently introduced border restrictions, saying they will help the government avoid a new lockdown and stay in force until at least the end of February.
Germany installed border controls with the Czech Republic and Austria last Sunday, drawing protest from Austria and concerns about supply-chain disruptions.
Berlin calls the move a temporary measure of last resort.
Poland said on Saturday it had not ruled out imposing restrictions at the country’s borders with Slovakia and the Czech Republic due to rising COVID-19 cases.
(Reporting by Tim Hepher; Editing by Kirsten Donovan)
Why a predictable cold snap crippled the Texas power grid
By Tim McLaughlin and Stephanie Kelly
(Reuters) – As Texans cranked up their heaters early Monday to combat plunging temperatures, a record surge of electricity demand set off a disastrous chain reaction in the state’s power grid.
Wind turbines in the state’s northern Panhandle locked up. Natural gas plants shut down when frozen pipes and components shut off fuel flow. A South Texas nuclear reactor went dark after a five-foot section of uninsulated pipe seized up. Power outages quickly spread statewide – leaving millions shivering in their homes for days, with deadly consequences.
It could have been far worse: Before dawn on Monday, the state’s grid operator was “seconds and minutes” away from an uncontrolled blackout for its 26 million customers, its CEO has said. Such a collapse occurs when operators lose the ability to manage the crisis through rolling blackouts; in such cases, it can take weeks or months to fully restore power to customers.
Monday was one of the state’s coldest days in more than a century – but the unprecedented power crisis was hardly unpredictable after Texas had experienced a similar, though less severe, disruption during a 2011 cold snap. Still, Texas power producers failed to adequately winter-proof their systems. And the state’s grid operator underestimated its need for reserve power capacity before the crisis, then moved too slowly to tell utilities to institute rolling blackouts to protect against a grid meltdown, energy analysts, traders and economists said.
Early signs of trouble came long before the forced outages. Two days earlier, for example, the grid suddenly lost 539 megawatts (MW) of power, or enough electricity for nearly 108,000 homes, according to operational messages disclosed by the state’s primary grid operator, the Electric Reliability Council of Texas (ERCOT).
The crisis stemmed from a unique confluence of weaknesses in the state’s power system.
Texas is the only state in the continental United States with an independent and isolated grid. That allows the state to avoid federal regulation – but also severely limits its ability to draw emergency power from other grids. ERCOT also operates the only major U.S. grid that does not have a capacity market – a system that provides payments to operators to be on standby to supply power during severe weather events.
After more than 3 million ERCOT customers lost power in a February 2011 freeze, federal regulators recommended that ERCOT prepare for winter with the same urgency as it does the peak summer season. They also said that, while ERCOT’s reserve power capacity looked good on paper, it did not take into account that many generation units could get knocked offline by freezing weather.
“There were prior severe cold weather events in the Southwest in 1983, 1989, 2003, 2006, 2008, and 2010,” Federal Energy Regulatory Commission and North American Electric Reliability Corp staff summarized after investigating the state’s 2011 rolling blackouts. “Extensive generator failures overwhelmed ERCOT’s reserves, which eventually dropped below the level of safe operation.”
ERCOT spokeswoman Leslie Sopko did not comment in detail about the causes of the power crisis but said the grid’s leadership plans to re-evaluate the assumptions that go into its forecasts.
The freeze was easy to see coming, said Jay Apt, co-director of the Carnegie Mellon Electricity Industry Center.
“When I read that this was a black-swan event, I just have to wonder whether the folks who are saying that have been in this business long enough that they forgot everything, or just came into it,” Apt said. “People need to recognize that this sort of weather is pretty common.”
This week’s cold snap left 4.5 million ERCOT customers without power. More than 14.5 million Texans endured a related water-supply crisis as pipes froze and burst. About 65,000 customers remained without power as of Saturday afternoon, even as temperatures started to rise, according to website PowerOutage.US.
State health officials have linked more than two dozen deaths to the power crisis. Some died from hypothermia or possible carbon monoxide poisoning caused by portable generators running in basements and garages without enough ventilation. Officials say they suspect the death count will rise as more bodies are discovered.
THIN POWER RESERVE
In the central Texas city of Austin, the state capital, the minimum February temperature usually falls between 42 and 48 degrees Fahrenheit (5 to 9 degrees Celsius). This past week, temperatures fell as low as 6 degrees Fahrenheit (-14 degrees Celsius).
In November, ERCOT assured that the grid was prepared to handle such a dire scenario.
“We studied a range of potential risks under both normal and extreme conditions, and believe there is sufficient generation to adequately serve our customers,” said ERCOT’s manager of resource adequacy, Pete Warnken, in a report that month.
Warnken could not be reached for comment on Saturday.
Under normal winter conditions, ERCOT forecast it would have about 16,200 MW of power reserves. But under extreme conditions, it predicted a reserve cushion of only about 1,350 MW. That assumed only 23,500 MW of generation outages. During the peak of this week’s crisis, more than 30,000 MW was forced off the grid.
Other U.S. grid operators maintain a capacity market to supply extra power in extreme conditions – paying operators on an ongoing basis, whether they produce power or not. Capacity market auctions determine, three years in advance, the price that power generators receive in exchange for being on emergency standby.
Instead, ERCOT relies on a wholesale electricity market, where free market pricing provides incentives for generators to provide daily power and to make investments to ensure reliability in peak periods, according to economists. The system relied on the theory that power plants should make high profits when energy demand and prices soar – providing them ample money to make investments in, for example, winterization. The Texas legislature restructured the state’s electric market in 1999.
Since 2010, ERCOT’s reserve margin – the buffer between generation capacity versus forecasted demand – has dropped to about 10% from about 20%. This has put pressure on generators during demand spikes, making the grid less flexible, according to North American Electric Reliability Corporation (NERC), a nonprofit regulator.
That thin margin for error set off alarms early Monday morning among energy traders and analysts as they watched a sudden drop in the electrical frequency of the Texas grid. One analyst compared it to watching the pulse of a hospital patient drop to life-threatening levels.
Too much of a drop is catastrophic because it would trigger automatic relay switches to disconnect power sources from the grid, setting off uncontrolled blackouts statewide. Dan Jones, an energy analyst at Monterey LLC, watched from his home office in Delaware as the grid’s frequency dropped quickly toward the point that would trigger the automatic shutdowns.
“If you’re not in control, and you are letting the equipment do it, that’s just chaos,” Jones said.
By Sunday afternoon about 3:15 p.m. (CST), ERCOT’s control room signaled it had run out of options to boost electric generation to match the soaring demand. Operators issued a warning that there was “no market solution” for the projected shortage, according to control room messages published by ERCOT on its website.
Adam Sinn, president of Houston-based energy trading firm Aspire Commodities, said ERCOT waited far too long to start telling utilities to cut customers’ power to guard against a grid meltdown. The problems, he said, were readily apparent several days before Monday.
“ERCOT was letting the system get weaker and weaker and weaker,” Sinn said in an interview. “I was thinking: Holy shit, what is this grid operator doing? He has to cut load.”
Sinn said he started texting his friends on Sunday night, warning them to expect widespread outages.
‘SECONDS AND MINUTES’
Early Monday morning, one of the largest sources of electricity in the state – the unit 1 reactor at the South Texas Nuclear Generating Station – stopped producing power after the small section of pipe froze in temperatures that averaged 17 degrees Fahrenheit (9 degrees Celsius). The grid lost access to 1,350 MW of nuclear power – enough to power about 270,000 homes – after automatic sensors detected the frozen pipe and protectively shut down the reactor, said Victor Dricks, a spokesman for the U.S. Nuclear Regulatory Commission.
About 2:30 a.m. (CST), the South Plains Electric Cooperative in Lubbock said it received a phone call from ERCOT to cut power to its customers. Inside the ERCOT control room, staff members scrambled to call utilities and cooperatives statewide to tell them to do the same, according to operational messages disclosed by the grid operator.
Three days later, ERCOT Chief Executive Bill Magness acknowledged that the grid operator had only narrowly avoided the calamity of uncontrolled blackouts.
“If we hadn’t taken action,” he said on Thursday, “it was seconds and minutes (away), given the amount of generation that was coming off the system at the same time that the demand was still going up.”
(Reporting by Tim McLaughlin and Stephanie Kelly; additional reporting by Nichola Groom; editing by Simon Webb and Brian Thevenot)
UK could declare Brexit ‘water wars’ – The Telegraph
(Reuters) – Britain could restrict imports of European mineral water and several food products under retaliatory measures being considered by ministers over Brussels’ refusal to end its blockade on British shellfish, the Telegraph reported.
Senior government sources pointed to potential restrictions on the importing of mineral water and seed potatoes, the report said.
(Reporting by Maria Ponnezhath in Bengaluru; Editing by Daniel Wallis)
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