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July 3 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Italy-based Finmeccanica SpA’s (FM) Long-term Issuer Default Rating (IDR) at ‘BB+’ and Short-term IDR at ‘B’. The agency has also affirmed Finmeccanica Finance SA’s and Meccanica Holding Inc’s senior unsecured ratings at ‘BB+'. The Outlook on the Long-term IDR is Negative.
The Negative Outlook reflects the risk that FM’s restructuring measures may take longer than expected in yielding an improvement in the company’s FFO and FCF generation, while debt and leverage are high for the ratings. It also reflects that deleveraging may take longer to achieve than envisaged. Fitch expects to review the ratings again by the end of 2014 with a view to assessing whether progress on margin improvement and deleveraging potential is adequate to maintain the ‘BB+’ ratings.
Fitch is assuming that the company’s FFO margin will improve gradually over the course of 2014. A return to profitability levels expected of a ‘BB+’ company in this sector is key to maintaining the present ratings. While Fitch expects FCF to be negative in 2014 due to a weak defence outlook, high capex and an only gradually improving operational profile, sustained positive FCF generation in the years after is also key to maintaining the ratings.
Recent operating performance has been fairly poor, with the funds from operations (FFO) margin falling to 5.5% for the last 12 months (LTM) to 31 March 2014, (from 6.1% in 2013) as weakness in the US defence and transportation segments more than offset improvements in helicopters and aeronautics. LTM FCF was materially worse than expected, at negative EUR403m, as a result of a large working capital outflow stemming from a cancellation of a helicopter order as well as slightly higher-than- expected capex.
Finmeccanica had gross leverage of 4.4x at end-2013, above the downgrade guideline of 4x. As debt reduction is integral to maintaining the present ratings, Fitch expects this ratio to trend towards 4x in the medium term, absent any accelerated debt repayment from asset disposals. A sustained improvement in leverage to under 4x, either from the cash proceeds from asset sales or FCF generation would significantly enhance the prospects of changing the outlook to Stable.
Slow Deleveraging From Asset Disposals
To date, the sale of Ansaldo Energia (FM received EUR277m cash and deconsolidated EUR183m debt), and of FM’s 15% stake in aero engine parts maker, AVIO SpA (worth EUR260m), have been announced, yielding the company around EUR800m, some of which will be received after 2014. The company may complete the sale of other identified assets such as in the transportation segment; however, the slower-than- expected process of disposals to date means that deleveraging is not materialising as quickly as previously expected.
In May 2014 Mauro Moretti took over as CEO from Alessandro Pansa, making Mr Moretti the fourth CEO within the past three years. While Fitch acknowledges the focus Mr Moretti’s strategic review brings to improvements in the cash generation capacity of Finmeccanica, it is too early to determine the effect of the latest appointment, and possible changes to the overall strategy of the company mean that restructuring efforts may not yield the desired effect.
The company has made significant efforts to bring corporate governance in line with international peers. This is illustrated in the appointment of the new Chairman, Giovanni De Gennaro, former national police chief. We believe it is too early to ascertain the effectiveness of these measures, and corporate governance will continue to be a rating driver.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO based lease adjusted gross leverage at above 4x on a sustained basis
- FFO margin below 7%
- Consistently negative FCF
- Further material cash restructuring charges
- New material adverse findings or actions in relation to the corruption and bribery investigations into FM taking place
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Successful disposals of non-core assets, with consequent debt reduction of approximately EUR800m
- FFO adjusted leverage sustainably below 2.5x (at least two years, with at least one being historical)
- FFO margin sustainably above 9% (at least two years, with at least one being historical)
- FCF/revenue consistently above 2%
- Evidence of improvement in corporate governance