TEXT-S&P summary: Thales S.A.

Mon Dec 3, 2012 7:32am EST

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Liquidity

We consider Thales' liquidity to be "exceptional" as defined by our criteria. Liquidity is supported by cash balances of about EUR1.9 billion as of Dec. 31, 2011, of which we view EUR400 million as needed for ongoing operations. For this reason, we do not deduct this debt in our calculation of Thales' credit ratios. Similarly, we do not view the proportionately consolidated cash of EUR179 million that sits at the group's DCNS naval business as accessible by Thales.

Internal liquidity is supplemented by an undrawn revolving credit facility of EUR1.5 billion, which was committed by 20 banks and matures in December 2015. Financial covenants in this facility with accelerated payment would only apply in the event that the French government no longer held its golden share in Thales and, simultaneously, the group's ratio of consolidated net financial debt to EBITDA were to exceed 3x. The revolving facility has a step-up for rating deteriorations but no step-down for rating improvements.

For 2012, we expect Thales to generate positive discretionary cash flow. Consequently, operating cash needs do not affect financial flexibility.

As of Dec. 31, 2011, Thales' short-term debt was EUR437 million. On the same date, maturities falling due in 2013 amounted to EUR674 million, which included a EUR600 million bond due in April 2013. Cash generation at Thales is heavily skewed toward the second half of the year, as is the case for the majority of defense companies. In our view, Thales' financial flexibility is sufficient to cover such usual seasonal cash flow variations.

Outlook

The positive outlook reflects the potential for a rating upgrade in the next 24 months. This is based on the operating outlook which is supported by a group backlog of EUR26 billion and the likelihood that Thales will continue to generate operating profits and positive FOCF in line with our base-case assumptions.

We could raise the ratings if Thales' financial credit metrics were to improve such that the group's financial risk profile was more solidly placed in the category "modest". This would require sustainable FFO to debt (adjusted by Standard & Poor's) of about 60% and debt to EBITDA of about 1.5x. Our base-case projections suggest the group could achieve these targets within in the next two years. In addition, an upgrade would require continuation of group's conservative financial policy, thereby constraining large acquisitions and shareholder remuneration.

We could revise the outlook to stable if Thales were to carry out very sizable acquisitions or engage unexpectedly in considerable shareholder remuneration. We could also revise the outlook to stable if projected FOCF were lower than cash dividends as this would suggest that our base-case assumption of gradual deleveraging would not eventuate. We could also revise the outlook to stable if unexpected operational problems led to substantial cash-effective charges.

Related Criteria And Research

-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

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