Summary of the Rating Report. Scholz Holding GmbH. 8 th August 2016

Transcription

1 Summary of the Rating Report

2 0 Issuer Rating 0 Issuer Rating Outlook - Industry Trade and recycling of ferrous and non-ferrous scrap metal Total sales ,1 bn Employees ,782 BUSINES RISK significantly increased ANCHOR-RATING Modification 1 STAND-ALONE-RATING Modification 2 ISSUER RATING Operational risks External influence FINANCIAL RISK significantly increased BUSINESS RISK significantly increased OPERATIONAL RISKS - 0 Highly cyclical, strong volatility in commodity prices Intense competition in the recycling industry Primary strategic focus on the core business of ferrous and non-ferrous scrap metal Complex group structure Price risk in storage business FINANCIAL RISK significantly increased EXTERNAL INFLUENCE ± 0 Very weak profitability Development of capital structure being subject to certain conditions Very weak financial flexibility No relevant external influence Key financial ratios * margin (%) Return on Capital employed (ROCE) Equity ratio (%) Debt to equity ratio (%) Total liabilities / Net financial liabilities / EBIT interest coverage interest coverage * adjusted in accordance with EHRG s analysis principles Euler Hermes Rating GmbH

3 Rating rationale Euler Hermes Rating confirms the -rating of due to the debt write-offs that have been negotiated with the creditors as well as and the contractually agreed restructuring of the capital structure being subject to certain conditions. Significantly increased business risk with regards to cyclicality, competition and strategic positioning We assess the business risk of Scholz Group as significantly increased on account of its exposure to the heavily cyclical steel sector, volatile commodity prices and the intense competition in the recycling industry. Positive factors are the site network in Germany and the strong logistics and recycling skills. Potential strategic weaknesses are in our view the dependency on the European steel market, the low level of differentiation of the range of services as well as the tense supplier relationship caused by the funding situation. We see future upside potential through capital and liquidity injection, the currently pursued implementation of a restructuring program and also possible synergies with a strategic investor. Significantly increased financial risk due to debt write-offs No modification to the anchor-rating We consider the financial risk currently as significantly increased. Major determinants are the debt write-offs that have been negotiated with the creditors and the contractually agreed restructuring of the capital structure being subject to certain conditions. We assess the current operating profitability as weak and continue to expect a negative annual result for the current business year due to historically evolved, high interest payments and extraordinary expenses. In our view the financial flexibility is very weak. However, liquidity has improved by a bridge loan provided by the Chiho Tiande Group. The complex group structure and price risk in the storage business bear operational risks. However, we do not make modifications. Euler Hermes Rating GmbH

4 Company Trade and recycling of ferrous and non-ferrous scrap Multimodal logistics network in 20 countries Direct purchase of scrap from where it arises through own recycling sites Shareholders are directly or indirectly Oliver and Berndt-Ulrich Scholz Registered office relocated to London, changes in management is the rating object With an average of 5,782 employees,, London, and its affiliates (Scholz Group) generated consolidated sales of 3.1 billion from trade in and recycling of ferrous and non-ferrous scrap in During this period, it handled a total volume of around 7.6 million tons. The company operates more than 200 collection and recycling sites in 20 countries. In Germany it has 110 facilities. All the recycling sites and all its major storage facilities have railway links. Over 80 % of the recycled scrap is transported by rail. In addition to this, the Scholz Group has a fleet of over 800 container trucks and more than 100,000 containers. The logistics system also includes the use of inland vessels and ocean-going ships. Its machinery and plant inventory comprises more than 20 shredders as well as hydraulic excavators, shears, presses and drop impactors. In third-party trading business, materials are transported directly from the place of origin to the customers. In storage business, the volume is transported to the closest recycling site for processing. The Scholz Group mainly buys scrap arising from the processing and recycling of metals, demolitions, gutting projects as well as in connection with consumer goods such as cars, washing machines, refrigerators etc. in Southern Germany, the Eastern German states, Eastern Europe, Austria, Denmark, North Africa and the United States. The scrap is bought directly from where it is produced, i. e. industrial and commercial facilities, under waste disposal contracts. Alternatively, small volumes are delivered directly to the Scholz Group s scrapyards. Other services include the dismantling of rolling stock, demolition work, container services, the development of integrated waste management systems, contract briquetting and cable dismantling. Its main sell-side markets are Germany (40 % of sales), the United States, Austria, Italy, Belgium, Turkey and China. Customers of scrap include electrical and converter steel mills, foundries, aluminium and copper smelting plants. Voestalpine, ArcelorMittal and ThyssenKrupp number among its customers. Shareholders of are Oliver Scholz with 59.9 %, Berndt-Ulrich Scholz with 16.1 % and Scholz Beteiligungsgesellschaft mbh with 24.0 % of the capital. The shares formerly held by TTC were transferred to the Scholz family or partially to the Scholz Beteiligungsgesellschaft GmbH in return for payment. Regarding these shares a trust structure was established. Registered office, management and business activity of were relocated to London as per 14 th January The management comprises Oliver Scholz (Chief Executive Officer) as well as Michael Thomas and Neil Robson (Chief Restructuring Officers). Furthermore, Scholz Management Service GmbH, Essingen, was founded as per 01 st January 2016 and took over all tasks regarding the governance of the group s operating activity. The management of the new corporation, which is a 100 %-subsidiary of, comprises Oliver Scholz (CEO), Dr. Kay Oppat (Chief Operating Officer) and Dr. Carsten Meyer-Raven (Chief Financial Officer), who joined Scholz Group as per 01 st April 2016., London, as the parent company of the group, is the rating object. Euler Hermes Rating GmbH

5 Execution of the rating This report is a condensed summary of the detailed rating report of 0. The detailed rating report, which is submitted to the company and is not being published by Euler Hermes Rating GmbH, forms the basis for the rating notation. The rating request was submitted by on 08 th June The company was visited on 25 th July This rating report was presented to the client on 16 th August 2016, meaning that the rating process has now been concluded. The notation proposal and the report on which it was based were reviewed by the Rating Committee on 8 th August 2016 and approved in their current form. If this rating is not made public, the rating refers to this date. If the rating assessment is published on the rating agency s website ( it will be followed by a subsequent oneyear monitoring process. During this period, the company and the environment in which it operates remain under observation. The rated company is subject to unrestricted disclosure obligations during this period. Any change in the rating agency s assessment will result in a change in the published rating, meaning that the rating as shown on the internet represents the current rating assessment at all times. Continued publication after the expiry of the monitoring period is contingent upon a follow-up rating being conducted. The client is solely and exclusively liable for any errors or omissions in the documents and information supplied openly and willingly in response to our requests for information. The client has reviewed the rating report and confirms that all of the information which it contains is correct and complete in all significant respects, that no major aspects have been concealed and that any forward-looking statements which it may include are based on plausible, verifiable and current data and have been prepared by the client with the diligence of a prudent businessman. However, the client cannot be held liable if actual results differ from the forward-looking statements, in particular the projections, presented in this document. Changes in the economic environment and unforeseen events may impair the validity of the forward-looking statements and projections. The rating report may not be construed as constituting a recommendation to participate in certain facilities. All recipients of the information should conduct their own independent analyses, credit assessments and other reviews and evaluations which are customary and necessary to reach a final decision about the participation in certain facilities. It should be noted that the summaries of contracts, legislation and other documents included in the report are no replacement for examination of the corresponding full texts. As of the date on which this information is published, it is not possible to guarantee that the information has not changed since being collected and that all information provided is still valid. The client is under no obligation to update the information. The publication of this rating report may be prohibited by law in certain jurisdictions. The client therefore requests that any persons who gain possession of this information enquire about and comply with any such restrictions. The client does not assume any liability of any kind towards anyone with respect to the dissemination of this rating report in any jurisdiction whatsoever. The client s management has submitted to Euler Hermes Rating GmbH a written letter of representation. We have prepared this report to the best of our abilities and knowledge. Euler Hermes Rating GmbH Hamburg, 16 th August 2016 Euler Hermes Rating GmbH

6 Analysts Holger Ludewig, director and project manager Katia Drummen, junior analyst Rating committee Kai Gerdes, director Dr. Sascha Heller, senior analyst Principal sources of information Consolidated financial statements 2012, 2013, 2014 Extracts from internal reports (e. g. business performance 2015 and 2016, list of financial liabilities, etc.) Overview of restructuring measures as of August 2016 Market analyses Strategy paper and corporate planning Documents on corporate structure Interviews with management Rating methodology Issuer rating of Euler Hermes Rating GmbH of May 2016 ( Euler Hermes Rating GmbH

7 Appendix 1: Rating notations Category Explanation AAA AA A BBB BB B CCC CC C D AAA rated companies demonstrate an excellent credit quality. Such companies are characterized by an extremely positive future outlook and are viewed as being first class business partners. Although the various security elements can certainly change, such changes - to the extent this can be assessed - are highly unlikely to adversely affect the fundamentally strong position of such companies. AA rated companies demonstrate very high quality with respect to future security. Along with the AAA rated companies, this group forms the so-called quality class. Security margins may, however, be comparatively thinner, the solidity of the security elements may fluctuate more or individual assessment components may indicate a greater long-term risk than is the case for AAA rated companies. A rated companies demonstrate high quality with respect to future security. They show many favourable features which secure their future. Nevertheless, there may be isolated factors which reveal a slightly in-creased susceptibility to the worsening of circumstances and general economic conditions in the future. BBB rated companies demonstrate reasonable quality with respect to future security. Compared to A rated companies, however, it is more likely that worsening of general economic conditions could weaken the capability of fulfilling financial obligations. BB rated companies still have structures adequate to secure their future. Yet they are subject to greater insecurities. Negative business developments or changes in the general financial and economic conditions can make it impossible for them to fulfil their financial obligations in a suitable manner. B rated companies lack the usual structures to secure their future. Negative business developments or changes in the general financial and economic conditions will most likely make it impossible for them to fulfil their financial obligations in a suitable manner. CCC rated companies have structures which greatly endanger the security of their future. Capital service is in jeopardy. Such a company is dependent on a favourable development of general economic conditions if it is to be able to meet its financial obligations in the long term. Companies receiving a CC rating have very little security for their future. Capital service is in great jeopardy. C rated companies have the least future security of all. The basic conditions enabling such debtors to fulfil their financial obligations are extremely poor. Default is imminent. Companies with a D rating are already in default of payment or have filed for bankruptcy. The D rating is irrelevant for the future; it documents solely the bankruptcy of the company. NR If an issuer defaults with respect to a certain financial liability or class of liabilities but is still able to honour its payment obligations under other financial liabilities or classes of liabilities within the requisite period, it is assigned (selective default) status. A debtor or an issuer not rated by Euler Hermes Rating is classified as NR (Not Rated). PLUS (+) MINUS (-) Rating notations from AA to CCC may be complemented by a PLUS (+) or MINUS (-) if required, in order to show their relative position within the respective rating category. Euler Hermes Rating GmbH

8 Appendix 2: Definition of ratios Earnings potential and profitability margin margin Total revenues Returns ROCE Adjusted operating result (= EBIT) Net financial liabilities + economic equity (= capital employed) Total return on capital Adjusted operating and financial result + interest expense Adjusted capital Cash flow return on investment Cash flow return on investment (cash flow ROI) Adjusted total capital Euler Hermes Rating GmbH

9 Capital structure and debt to equity ratio Debt Equity ratio Adjusted equity (=economic capital) Adjusted total capital Debt to equity ratio Net financial liabilities Net financial liabilities + economic equity (= capital employed) Net financial liabilities Net financial liabilities Bonds + Liabilities to banks + Bill Liabilities + Other interest-bearing liabilities + Operating lease liabilities + Adjustments for ABS / factoring transactions - Cash and cash equivalents Degearing periods Total liabilities / Total capital - economic capital (=total liabilities) Net financial liabilities / Net financial liabilities Interest coverage EBIT interest coverage Adjusted operating result (= EBIT) Interest expense interest coverage Interest expense Euler Hermes Rating GmbH