German Slowdown Imperils 450-Year-Old Manufacturer 

(Bloomberg) --

Creditors to one of Germany’s oldest companies, Leoni AG, have started cutting exposure to the auto parts maker in a sign of growing investor unease with the country’s lackluster economy.

A number of investors have sold their portions of the company’s 590 million euros ($652 million) of so-called Schuldschein debt at a discount, according to people familiar with the matter, who asked not to be identified because it’s private. Leoni, which makes electrical components for cars and traces its origins back to the 16th Century, is saddled with around 1.2 billion euros in debt and must repay 170 million euros of its Schuldschein notes when they mature in March.

Schuldschein is a German debt product combining elements of both bonds and loans.

Separately, a group of banks that provided Leoni with credit lines worth 750 million euros have hired law firm Freshfields Bruckhaus Deringer to advise in potential debt talks with the company. A Freshfields spokesman declined to comment.

Leoni, which started out in Nuremberg making high quality threads in 1569 and now employs almost 100,000 people in 32 countries, has seen its shares fall 60% this year as it struggled against slower demand.

Expected Loss

Analysts forecast a 240 million-euro loss for Leoni this year, after it burned through 40% more cash in the first nine months compared with 2018, according to its financial reports. It had 583 million euros of available liquidity at the end of September.

“Leoni’s liquidity is on the edge,” said Christian Ludwig, an analyst at Bankhaus Lampe. “They have around 1 billion euros of debt and no substantial improvements are expected until the end of the year.”

Still, the company is sufficiently funded to repay a debt maturity due in March, according to a company spokesman. It’s also fully repaid 49 million euros of Schuldschein debt due in September.

Leoni shares fell about 6% on Wednesday to around 11.9 euros after Bloomberg reported some creditors had sold their exposure.

“This can quickly lead to a downward spiral,” Daniel Kukalj, an equities analyst at Quirin Privatbank, said by phone. “Investors apparently being willing to sell their Schuldschein at a discount shows that they have little confidence in the company’s further development.”

The sale of Schuldschein holdings by some of its investors may complicate matters for management as it works toward bolstering its balance sheet. Hedge funds specializing in distressed debt -- if they were the buyers -- may prove tougher negotiators than the original investors. That’s ominous because Schuldschein debt needs unanimous support from investors to reform terms, unlike other kinds of debt that just need majority backing.

In 2018, a crisis at South African retailer Steinhoff International Holdings NV sparked a secondary trading frenzy. Sales of Steinhoff’s 755 million euro Schuldschein drew scores of new debt traders into the traditionally quiet secondary Schuldschein space.

Profit Revival

Leoni is likely to return to profit in 2021 and may benefit from a cash windfall by selling its wire and cable unit WCS, according to Jurgen Pieper, an analyst at B Metzler Seel Sohn & Company.

However, buyers for the unit --which was unprofitable in the third quarter-- have yet to materialize and a sale might only happen after the Schuldschein tranches mature in four months. Another 25 million euros of the debt comes due in November next year, Leoni’s Chief Executive Officer Aldo Kamper said in an earnings call on Nov. 13.

Financial adviser Hans-Joachim Ziems has over recent past months been working with Leoni on its performance and strategy program, which aims at 500 million euro annual cost savings by 2022, the company’s spokesman said.

--With assistance from David Verbeek.

To contact the reporters on this story: Fabian Graber in London at fgraber2@bloomberg.net;Jacqueline Poh in London at jpoh39@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Chris Vellacott

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