Oct 11 (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
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
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).