Schmolz + Bickenbach - thoughts on Bull Whip and CoC

All,
There were two themes to Schmolz’ call today: downturn and CoC.
On downturn:- The company is clearly suffering from what is called the “Bull Whip” effect of supply chain i.e. the magnification of order volatility further and further up the supply chain, usually exacerbated by increasing fixed cost levels among raw material producers. In just that way, Schmolz is removed from the supply and demand pattern as seen by the OEMs and likely has a break-even load factor of 90%+.- Because the company is so removed from the forefront of the consumer market, it is also unable to project when it would find rising order volumes again. Order volumes this summer have been spectacularly low in Germany. But even in 2010 volumes sprang back up to quite reasonable levels only one year after they fell (see graph below). - Clearly, if tariffs were introduced and were to stay in place for the long-term, German car production would be structurally lower than it has been up to summer 2019, but again, most would recover and swiftly.

On CoC:

- We think it is safe to assume that a shareholder won’t be looking to underwrite a rights issue in which he is aiming for a certain minimum stake (size of the two other large shareholders), only to:

1) take out a lot of bonds in the process and do the other shareholders a big favour, or

2) instantly lose his underwritten amount in case the company can’t refinance the triggered bonds.

- The underwriting seems to be conditioned upon, among other things, the continued availability of financing. So the only way to square the conundrum would be for banks to replace the bonds. But that a market value of 80c/E that looks equally unlikely.

- We are wondering under what circumstances the company could coerce bondholders into a waiver.

In any event, all these deliberations seem to be taking place well outside EV at the moment. So we will do some further work, but won’t be jumping into a position quite yet.

Wolfgang