RPT-Fitch affirms Rolls-Royce at 'A'; outlook stable
Oct 11 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Rolls-Royce Holdings plc's (Rolls-Royce) Long-Term Issuer Default Rating (IDR) and its senior unsecured rating at 'A'. The Short-term IDR has also been affirmed at 'F1'. The Outlook on the Long-term IDR is Stable.
KEY RATING DRIVERS
Strong Financial Performance
Rolls-Royce has demonstrated a continuously strong and stable financial performance, despite the inherent cyclicality of some of its end-markets. For the last 12 months (LTM) to 30 June 2013 the group improved its ratio of funds from operations (FFO) to revenue to 14%, from 13% in 2012, and maintained a net cash position.
LTM free cash flow (FCF) was weak at 1.2% as a result of a large working capital outflow, and is low for the current rating. However, Fitch expects the full year working capital impact to be slightly positive and does not see the weak FCF as a rating risk given the company's cash generation stability, generally low levels of debt and strong liquidity.
Resilient Business Profile
Over the past several years, Rolls-Royce has demonstrated an ability to manage a broad portfolio of turbine-related assets, and to generate strong cash, despite industry challenges and wider economic pressures. The company is well placed to withstand potential declines in demand resulting from deteriorating market conditions, due to its business diversification, its focus on organic growth, its growing proportion of customers taking out long-term service contracts, and its cost-cutting measures.
Commercial Aerospace Outlook
Rolls-Royce derives about half of its turnover from the commercial aerospace industry, where the outlook for engine deliveries and service work remains positive. Despite the weak earnings outlook for most airlines, production of large commercial aircraft - and the engines that the company manufactures for these aircraft - is set to increase in 2013 and again in 2014, reflecting the strength and quality of the order book.
Rolls-Royce benefits from strong business diversification: it is involved in the marine and defence aerospace segments, shielding the company from the larger but more volatile commercial aerospace segment.
Leading Market Position
The ratings reflect the company's position as a top-tier power systems provider, its substantial order backlog, which at 30 June 2013 was close to GBP70bn, or 5x annual revenue, its large and growing share of revenue derived from after-sales activities, and its geographic diversification.
Strong Liquidity Position
In addition to its GBP2.5bn of cash and short-term deposits at end-H113, Rolls-Royce has committed long-term banking facilities totaling GBP1bn. Consistently positive free cash flow (FCF) generation has allowed the company to maintain a strong and consistent net cash position in each of the past six years. Rolls-Royce has a back-ended debt maturity profile, and, as evidenced with its two bonds issued in Q213 totaling around GBP1bn, maintains strong access to capital markets, which it can tap for further funding.
Positive: An upgrade is unlikely in the absence of a material change to the group's business profile, given that the company has reached a rating level close to the highest Fitch deems achievable for the aerospace and defence industry.
Negative: An adverse shift in financial policy, although considered unlikely by Fitch, could affect the ratings. A more shareholder-friendly capital structure, either via a significantly increased dividend or a share buyback, may have an impact on ratings. A lease-adjusted debt/FFO ratio of more than 2x (1.6x at end-2012) may put the ratings under pressure, as would a pre-financing FFO/revenue ratio of less than 10% over a sustained period (13% for 2012).
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