Fitch: Rolls Power Systems Deal Expected; Medium-Term Positive

Mon Mar 10, 2014 12:17pm EDT

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(The following statement was released by the rating agency) LONDON, March 10 (Fitch) Rolls-Royce's acquisition from Daimler of the remaining 50% of its Power Systems joint venture has already been factored into the company's current ratings, Fitch Rating says. The purchase will not significantly affect financial flexibility or increase leverage in the near term. If anything, greater control of the business and the improved diversification it gives Rolls-Royce should strengthen its credit profile in the medium term. For Daimler the expected proceeds from the transaction will be positive, but won't affect its rating. The Rolls-Royce/Daimler joint venture, which began three years ago with the acquisition of marine diesel engine group Tognum, diversified Rolls-Royce's business profile by strengthening its position in the strongly growing marine turbine industry. Full control of Power Systems will allow Rolls-Royce to improve operational efficiencies and to increase returns from investments in new turbine technology. The deal will also reduce Rolls-Royce's reliance on the commercial aerospace market, which currently generates over 40% of group revenue. While the commercial aerospace outlook remains strong for the next couple of years, the market is somewhat volatile. Our ratings of both Rolls-Royce and Daimler have always reflected the likelihood of a full takeover by Rolls-Royce. Rolls-Royce had built up cash reserves of around GBP4bn at end-2013, which is well above historical levels and more than adequate to make the expected GBP1.9bn payment to Daimler without affecting the company's liquidity and financial flexibility. At end-2014, Fitch expects Rolls-Royce's gross leverage to remain broadly in line with the 1.7x achieved at end-2013, which is under the 2x leverage guideline for a downgrade from the present rating. For Daimler, the transaction will not have any immediate impact on its ratings. The proceeds will enhance further its liquidity but will be relatively modest compared to its net cash position of EUR8.5bn at end-2013. More important for the ratings would be evidence that the cyclicality of the truck division has diminished or that an improvement in profitability can be sustained, particularly at the Mercedes-Benz Cars and Daimler Trucks divisions. Contact: Tom Chruszcz Director Corporates +48 22 338 6294 Fitch Polska SA Krolewska 16 Warsaw 00-103 Emmanuel Bulle Senior Director Corporates +34 93 323 8411 Simon Kennedy Director Fitch Wire +44 20 3530 1387 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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