Nov 15 - Fitch Ratings has affirmed Finmeccanica SpA's Long-term Issuer Default Rating (IDR) at 'BBB-' and Short-term IDR at 'F3'. The agency has also affirmed Finmeccanica Finance SA's and Meccanica Holding Inc's senior unsecured ratings at 'BBB-'. The Outlook on the Long-term IDR is Negative.
The Negative Outlook reflects Fitch's concerns about the timeliness of the closing of the sales of the non-core assets, the continuing, albeit reduced, risks involved in completing the restructuring plan announced in Q411, and the currently weak defence spending environment in Finmeccanica's key markets, which may affect business growth assumptions in the short to medium term.
Finmeccanica has made the expected level of progress in its restructuring efforts in the first three quarters of 2012, with the company's financial performance to date broadly in line with Fitch's expectations. Results for 9M12 showed earnings margins and core cash generation gradually returning to the levels expected for a 'BBB-' rated company in the aerospace and defence sector, despite the industry headwinds and the continued structural issues at some of the company's divisions. Fitch expects this improvement to continue in Q412 and 2013, with the pre-financing funds from operation (FFO) margin expected to exceed 9% in 2012 and 11% in 2013, from below 8% in 2011. Fitch also expects the company to generate moderately positive, albeit increasing, levels of free cash flow (FCF) beyond 2012.
However, Finmeccanica's asset disposal programme, which was expected to yield EUR1bn of proceeds in 2012, appears to have slipped somewhat behind schedule. To date, no major asset sales have been announced and no cash proceeds are now expected to be received in 2012. Fitch believes that for Finmeccanica to maintain its investment grade status, asset disposals of the magnitude publically targeted by the company will need to be announced over the coming several months in order to improve the presently high leverage levels.
At end-2012, Finmeccanica's FFO lease adjusted gross and net leverage is expected by Fitch to be approximately 4.5x and 3.5x, respectively. However, assuming asset sale proceeds approaching levels targeted by the company and the improvement in the underlying cash generation of the group, these respective ratios are each expected to improve by around 1x. Fitch believes that with the improved leverage, Finmeccanica will retain an adequately strong fundamental business profile and enough performing assets to return the financial profile to the levels expected for an investment grade credit in this sector.
The company's current ratings are also reflective of its adequate liquidity position. At end-Q312, Finmeccanica held cash of EUR1.1bn, which is likely to rise significantly by year-end as a result of the typical large working-capital inflows in Q4 each year, whilst short-term debt was EUR2.3bn, although EUR755m of this is related party debt owed to JVs. Committed available bank lines total over EUR2bn. Finmeccanica has no bonds maturing until December 2013, when a EUR1bn bond matures, which is expected to be partly refinanced via a new long-term issue.
WHAT COULD TRIGGER A RATING ACTION?
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO based lease adjusted gross leverage above 3.5x beyond 2012
- FFO margin below 10% by 2013
- Negative FCF beyond 2012
- Further material cash restructuring charges
- Significant adverse findings in the corruption investigation pertaining to present members of management
Whilst an upgrade to the current ratings is unlikely in the short term, a revision of the Outlook to Stable would be possible if the company executes its asset disposal programme and applies the proceeds towards net debt repayment and continues to improve its cash generation in line with Fitch's expectations.