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Rating Action:

Moody's Affirms Finmeccanica Ratings; Outlook now Stable

12 Aug 2015

Approximately €5.5 billion of rated debt affected

New York, August 12, 2015 -- Moody's Investors Service affirmed its ratings for Finmeccanica S.p.A. and wholly-owned US subsidiary Meccanica Holdings USA Inc. -- including the Ba1 senior unsecured debt ratings -- and revised the rating outlook to Stable from Negative.

"The rating affirmation reflects our expectation that the company will continue to evidence modest improvements in profitability and cash flow measures driven by ongoing restructuring initiatives and balance sheet strengthening following the recent debt tender and permanent repayment ahead of forthcoming non-core asset divestitures" said Russell Solomon, Senior Vice President and Moody's lead analyst for Finmeccanica. "In addition to the assumed successful completion of the transportation assets sale to Hitachi later this year, stabilization of the rating outlook explicitly incorporates our expectation that Finmeccanica will maintain sufficient liquidity to fully accommodate its normal course business seasonality and associated working capital volatility, particularly during the multi-year period in which its free cash flow generating capability is restored to more acceptable levels for the rating category," Solomon added.

The following represents Moody's ratings and the specific rating actions for Finmeccanica and its subsidiaries:

..Issuer: Finmeccanica S.p.A.

....Probability of Default Rating, Affirmed Ba1-PD

....Corporate Family Rating, Affirmed Ba1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Ba1

....Senior Unsecured Regular Bond/Debentures, Affirmed Ba1 (LGD4)

....Outlook, Changed To Stable From Negative

..Issuer: Meccanica Holdings USA, Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba1 (LGD4)

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

The ratings broadly reflect high financial risk associated with the company's moderately leveraged balance sheet, modest profitability measures and coverage levels, and a weak free cash flow profile. This has been driven by a multi-year period of weak operating performance as partially spurred on by persistently tough defense markets, heightened competition and general macroeconomic weakness in certain business areas. Balancing these risks, however, are the company's large size and scope of business operations, solid liquidity and implicit support from the Government of Italy.

While Finmeccanica's firm-wide restructuring programs coupled with ongoing portfolio optimization initiatives should continue to yield gradual improvements in operating performance over the next several years, earnings and cash flows are likely to remain comparatively weak for the rating category. Macroeconomic headwinds -- particularly in the company's core European markets -- and the impact of lingering fiscal constraints on defense budgets, more broadly, are expected to persist. But material deterioration from current levels is not expected, and modest improvements are in fact expected over the medium to longer term rating horizon. We expect that Moody's-adjusted debt to EBITDA for Finmeccanica will trend towards 4x by the end of 2015 and 3.5x in 2016, from about 5.0x at June 2015. Free cash flow should transition from an essentially breakeven profile this year to $200 million or more annually as the cash consumptive transportation assets are finally sold off before year-end 2015, with incremental proceeds realized therefrom coupled with reduced cash outlays and related savings from ongoing restructuring initiatives expected to be utilized to effect further deleveraging of the balance sheet over the ensuing period.

With over €12 billion of estimated revenue proforma for the transportation assets divestiture and an operating profit base that is expected to approach €1 billion in 2016 (Moody's-adjusted basis), Finmeccanica's scale characteristics solidly underpin its relative positioning within the rating category. The company remains a critical Tier 1 contractor on several important aerospace and defense platforms -- including Eurofighter and F-35 -- and is a leading manufacturer of helicopters with a broad global installed base. Reasonably high-level revenue predictability is afforded by a sizeable backlog of nearly €30 billion, with good diversity of revenue streams in both commercial and military applications. Although the June 2015 cash balance of €611 million is more modest than historical cash levels that have regularly exceeded €1 billion, Moody's expects that Finmeccanica's fully available €2 billion revolver coupled with increased funds from operations will be sufficient to support ongoing working capital investment and capital expenditure requirements. The absence of material maturities until 2017 also lends support to the company's ratings and the stable rating outlook.

Ongoing implicit support from the Italian sovereign state also notably underpins Finmeccanica's ratings, as reflected in the one-notch of uplift (relative to the ba2 fundamental stand-alone baseline credit assessment) ascribed to the company's Ba1 corporate family rating and its Ba1 senior unsecured debt ratings. The Government of Italy (Baa2 stable) controls Finmeccanica's Board of Directors and holds an approximate 30% economic interest in the company as of May 2015. The level of default dependence between Finmeccanica and Italy is deemed to be moderate, and the level of support from the sovereign is also currently considered moderate.

The stable rating outlook reflects our expectation of modest but steady improvement in the company's cash flow and profitability measures as Finmeccanica continues to execute on its restructuring and portfolio optimization initiatives. The rating could be pressured if the pending sale of the cash consumptive Transportation assets fails to close, or if we observe the emergence of a financial policy that does not prioritize debt reduction such that leverage above 5x is expected to persist on a sustained basis. The rating could warrant consideration for potential upward adjustment if the company's credit profile improves more quickly than anticipated, as indicated by (among other things) leverage trending towards 3.5x or lower and operating profit margins trending towards the high-single-digit percentage range, on a sustained basis and as accompanied by maintenance of a strong liquidity profile.

The principal methodology used in these ratings was Global Aerospace and Defense Industry, published in April 2014. Other methodologies used include the Government-Related Issuers methodology published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Rome, Italy, Finmeccanica is one of Italy's largest industrial groups with principal operations in aerospace and defense and a recipient of about half of the country's annual defense outlays. We estimate that the company will generate over €12 billion of revenue in 2015.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Affirms Finmeccanica Ratings; Outlook now Stable
No Related Data.
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