July 16, 2013 / 12:25 PM / in 4 years

RPT-Fitch downgrades Finmeccanica to 'BB+'; outlook negative

July 16 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has downgraded Finmeccanica SpA’s (FM) Long-term Issuer Default Rating (IDR) to ‘BB+’ from ‘BBB-’ and Short-term IDR to ‘B’ from‘F3’. The agency has also downgraded Finmeccanica Finance SA’s and Meccanica Holding Inc’s senior unsecured ratings to ‘BB+’ from ‘BBB-'. The Outlook on the Long-term IDR is Negative. All ratings have been removed from Rating Watch Negative.

The downgrade reflects Fitch’s view that the previously assumed improvements in the financial profile relating to de-leveraging and underlying cash generation in the short term are unlikely to be achieved. This is the result of a combination of a weaker market outlook and delays in the asset disposal process. Consequently, we believe that FM will not exhibit the financial profile expected of an investment grade A&D company within the rating horizon.

Although actions have been taken to improve the corporate governance structure and bring it in line with international peers, it is too early to determine if the actions taken have been adequate to deal with the company’s recent corporate governance problems. Corporate governance will remain a key rating issue and driver.

The Negative Outlook reflects Fitch’s concerns over (i) the timeliness of de-leveraging and (ii) the potential for cash flow generation in the upcoming two to three years being weak for a ‘BB+’ rating, factors which when combined limit FM’s available headroom for the current rating.

KEY RATING DRIVERS

Delays in Asset Disposals

Fitch previously assumed that Finmeccanica would complete asset disposals of up to EUR1bn by early 2013, the proceeds of which were to be applied to net debt reduction. To date, only the 15% stake in aero engine parts maker, AVIO SpA, has been announced, which will bring in around EUR260m of proceeds. Whilst it is still possible that the company will complete the sales of targeted assets, the on-going delays in this process mean that the anticipated improvement in the company’s leverage position will not materialise in the expected time frame in order for the company to maintain an investment grade rating.

High Leverage, Poor FCF Outlook

At end-2012, FM exhibited a gross leverage level of over of 4x, which is not consistent with an investment grade rating in the A&D sector. In the absence of cash proceeds from asset disposals, FM is reliant on free cash flow (FCF) generation to reduce debt levels. However, Fitch expects FCF generation in the next two years to be weak as a result of an uncertain defence market outlook, high capex needs, the drag from the loss-making Ansaldo Breda subsidiary and an operational profile only gradually improving from the recently undertaken and on-going restructuring measures.

Corporate Governance

While Fitch views positively recent actions undertaken by the company’s management in relation to recent scandals involving prior senior management, the agency remains concerned about the potential for fresh bribery or corruption -related investigations into present and former FM managers. Significant new adverse developments involving senior company officers may further affect the company’s reputation globally as well as the execution of the restructuring plan, and this may have a rating impact.

Uncertain Defence Market Outlook

Key defence markets, from which FM generates over half of its revenues, like Italy, the US and the UK face uncertain budget outlooks. Fiscal pressures in European markets, coupled with the effects of sequestration in the US, mean that in the short term, revenue growth potential is likely to remain poor and cash generation weak.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to negative rating action include:

- New material adverse findings or actions in relation to the corruption and bribery investigations taking place.

- FFO based lease adjusted gross leverage sustained above 4x.

- Adjusted FFO margin below 7%.

- Consistently negative FCF.

- Further material cash restructuring charges.

Future developments that may, individually or collectively, lead to positive rating action include:

- Closure of disposals of non-core assets, with consequent debt reduction of approximately E800m.

- FFO adjusted leverage sustainably below 2.5x (at least two years, with at least one being historical).

- Adjusted FFO margin sustainably above 10% (at least two years, with at least one being historical).

- FCF/revenue consistently above 2%.

- Evidence of improvement in corporate governance

LIQUIDITY AND DEBT STRUCTURE

Adequate Liquidity

At end-Q113, FM held cash of EUR1,426bn, owing largely to the EUR600m bond placed in December 2012 to refinance the EUR1bn December 2013 bond (EUR750m outstanding). Net lease-adjusted debt was EUR6.3bn (end-2012: EUR4.9bn), although EUR573m of this is related party debt owed to JVs. Committed available bank lines total EUR2.4bn, with expiry in 2015.

FULL LIST OF RATING ACTIONS

Finmeccanica SpA

Long-Term IDR downgraded to ‘BB+’ from ‘BBB-’

Short-Term IDR downgraded to ‘B’ from ‘F3’

Senior unsecured rating downgraded to ‘BB+’ from ‘BBB-’

Finmeccanica Finance SA

Senior unsecured rating downgraded to ‘BB+’ from ‘BBB-’

Meccanica Holdings USA Inc

Senior unsecured rating downgraded to ‘BB+’ from ‘BBB-'

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