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Rating Action:

Moody’s: Leonardo S.p.A’s BCA upgraded to ba1 from ba2; Affirmation of Ba1 CFR; Stable Outlook

16 May 2019

Frankfurt am Main, May 16, 2019 -- Moody's Investors Service (Moody's) has upgraded Leonardo S.p.A.'s (Leonardo) Baseline Credit Assessment (BCA) to ba1 from ba2 and affirmed the Ba1 Corporate Family Rating (CFR). The outlook is stable.

A full list of affected ratings and entities can be found at the end of this press release.

RATINGS RATIONALE

"The upgrade of Leonardo's Baseline Credit Assessment to ba1 from ba2 - the company's standalone credit risk -- and affirmation of Leonardo's Ba1 Corporate Family Rating follows the gradual recovery of Leonardo's operational performance since 2013, which has driven stronger, and more sustainable credit metrics. Following the company's recent confirmation of its higher 2019 earnings guidance we expect these credit metrics will continue to improve over the next 12-18 months. We also expect stronger credit metrics will remain supported by the company's conservative financial policies and commitment to regain its investment grade rating." said Jeanine Arnold a Moody's Senior Vice President and lead analyst for Leonardo.

Moody's affirmation of Leonardo's Ba1 CFR follows an upgrade of the company's BCA to ba1 from ba2 on the back of stronger, more sustainable credit metrics. As at 31 December 2018 (2018) Leonardo's gross adjusted leverage excluding cash dividends received from joint ventures was 4.5x and around 3.9x including cash dividends received from joint ventures. Following confirmation of the company's 2019 guidance and our expectations that Leonardo has now rectified various operational issues within its Helicopter business, we expect some modest deleveraging in 2019 but then for leverage to improve more strongly in 2020 by just under a full turn compared with 2018. We also expect operating profit margins will improve more sustainably towards the high-single digit range. In 2018 Leonardo's operating profit margin was 6.0% (2017: 5.3%).

Moody's expectations of moderate extraordinary support from the Government of Italy (Baa3 stable) are unchanged, but a full notch for state support is no longer considered appropriate given the narrowing of the gap to one notch between the Italian Government's Baa3 rating and Leonardo's ba1 BCA. Moody's still factors in an element of state support, but further upward pressure on Leonardo's CFR would most likely be driven by a further strengthening in Leonardo's standalone performance and BCA rating. In particular, we would expect Moody's gross adjusted leverage excluding cash dividends to be less than 4.0x on a sustainable basis and for gross leverage including cash dividends to be below 3.5x on a sustainable basis. It is possible therefore, that positive rating pressure could develop over the next few quarters should the company's performance be in line with Moody's expectations.

Moody's expects that Leonardo's operational and financial performance will continue to improve on the back of: strengthening aerospace and defense market fundamentals, although we expect Italy's own defence spending will be under some pressure; Leonardo's strong order backlog, which is now equivalent to almost three years of revenues; its strong market positions; exposure to high growth markets; and its continued commitment to reduce debt levels and leverage.

However, Moody's is mindful that despite improvements in the company's operating performance and cash flow, market conditions remain challenging and Leonardo's margins may face pressure from competition, persistently low defense budgets and changes in government contracting practices. Operational challenges remain in some sub-segments of Leonardo's divisions, including the company's Aerostructures business.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Leonardo's solid positioning within the Ba1 rating due to its stronger operating performance and improving cash flow generation as well as some uplift for government support, albeit less than a full notch. Moody's expects key credit metrics will strengthen further over the next 12-18 months and that the company will maintain a disciplined conservative financial policy in addition to a solid liquidity profile.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's could upgrade Leonardo if its gross leverage excluding cash dividends is expected to be less than 4.0x on a sustainable basis and if gross leverage including cash dividends is below 3.5x on a sustainable basis. We would also expect operating profit margins to be more comfortably in the high-single-digit percent range, for FCF to be positive post dividend payments and for the company to maintain a strong liquidity profile.

Moody's would consider a negative rating action if Leonardo pursues financial policies that do not prioritize debt reduction when leverage is above 4.5x; the company's operating margins trend back towards the mid-single-digit percent range; there is a sustained decline in orders and ensuing pressure on the company's revenue profile and liquidity provisions weaken

The methodologies used in these ratings were Aerospace and Defense Industry published in March 2018, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

LIST OF AFFECTED RATINGS

..Issuer: Leonardo S.p.A.

Affirmations:

.... LT Corporate Family Rating, Affirmed Ba1

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

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

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba1

Outlook Actions:

....Outlook, Remains Stable

..Issuer: Leonardo US Holding Inc.

Affirmations:

....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Ba1

Outlook Actions:

....Outlook, Remains Stable

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

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.

Jeanine Arnold
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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