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Rating Action:

Moody's affirms Atlas Copco's A2/P-1 ratings; stable outlook

02 Feb 2015

Frankfurt am Main, February 02, 2015 -- Moody's Investors Service has today affirmed Atlas Copco AB's A2 unsecured long-term rating, the Prime-1 (P-1) and (P)P-1 short-term ratings, as well as (P)A2 rating of its medium term note programme. The action follows the company's recent announcement that it plans to redeem shares worth around SEK7 billion. The outlook on the ratings remains stable.

"Our affirmation of Atlas Copco's ratings reflects our expectation that the extraordinary share redemption, which comes on the top of an ordinary dividend of around SEK7 billion, does not indicate that Atlas Copco's financial policies have now become more aggressive," says Martin Fujerik, a Moody's Analyst and the lead analyst for Atlas Copco.

RATINGS RATIONALE

Today's rating action primarily reflects Moody's opinion that Atlas Copco's planned share redemption will have no material impact on the group's gross leverage since it will be to a large extent financed by available cash balances and sizeable ongoing free cash flow. The size of Atlas Copco's available cash balances and strength of its free cash flow generation are such that they also accommodated the cash-financed acquisition of Edwards group in the first quarter of 2014, for a purchase price of roughly SEK7 billion.

Following the share redemption, Moody's expects that Atlas Copco's gross leverage will remain at a healthy level of around 1.5x in next 12-18 months, which will position the credit quite strongly in the A2 category. The rating agency bases this expectation on Atlas Copco's very strong cash flow generating capabilities and the assumption that there will be (1) no additional extraordinary shareholder distributions in the next two years; and (2) no sizable acquisitions on top of the regular flow of acquisitions of roughly SEK2 billion per annum that Moody's assumes in its model. In its analysis, Moody's also notes that the debt is essentially used to finance the group's working capital, which has a self-liquidating character in downturns as demonstrated in 2009.

Despite the exposure to cyclical end markets, the rating agency views Atlas Copco's business profile as being very strong and resilient. In the last decade, the group has been consistently among the most profitable and most stable rated manufacturers in EMEA. Moody's observes that, despite an organic revenue decline of around 20% during the 2008-09 global economic downturn, which was unprecedented in its magnitude, Atlas Copco's EBITA margin remained at a very healthy level of above 16%. In addition, even with the current downturn in the mining sector, its EBITA margin has stayed close to 20%.

Atlas Copco's high and stable profitability is a reflection of (1) the company's very flexible cost structure; (2) a large share of more stable and profitable service business (around 40% of group revenues), which is supported by the company's large installed base and global service footprint that create an important barrier to entry; (3) its well-diversified customer base, which should under normal circumstances help mitigate end-market volatility; (4) its continuous focus on operating efficiency and cost-cutting measures taken at an early stage; (5) its focus on a direct sales model, where Atlas Copco primarily distributes products and services directly to the end customer, which benefits margins; and (5) its strong pricing power, reflecting the critical nature of Atlas Copco's products for its customers.

In addition, Atlas Copco follows an "asset-lighter" strategy, in which it manufacturers only critical components, representing around 25% of product costs. The fairly low capex/sales ratio of below 3% further benefits strong free cash flow generation, which Moody's expects to remain in the range of 10-20% of Moody´s adjusted gross debt in next 12-18 months.

Moody's believes that Atlas Copco's liquidity profile remains strong, backed by a committed back-up credit line of SEK13 billion, which matures 2019 and has no covenants or repeating material adverse change clauses. To optimize cash management, the extraordinary share redemption will be paid in June 2015, while the ordinary dividends will be split into two equal instalments: May 2015 and October 2015. There are no major debt maturities until 2017, when around SEK6 billion worth of bonds will mature.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that Atlas Copco will maintain an adequate capital structure, as reflected by its Moody's adjusted debt/EBITDA of below 2.0x. Despite the uncertain economic environment in the near term, Moody's anticipates that the group will sustain its solid operating performance, such as EBITA margin around 20%.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's would consider raising the rating if Atlas Copco were able to maintain its very strong business profile over a prolonged period, with a Moody's adjusted gross debt/EBITDA ratio consistently below 1.5x as well as an EBITA margin of around 20%, and demonstrate a commitment to a conservative financial policy.

Conversely, downward pressure on the rating could develop, should Moody's see a weakening of Atlas Copco's business profile, as indicated by a Moody's adjusted EBITA margin falling sustainably towards mid teens in percentage terms, indicating a weakening competitive position. It could also be triggered by the application of more aggressive financial policies, resulting in a Moody's adjusted gross debt/EBITDA ratio exceeding 2x on a sustainable basis.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Global Manufacturing Companies published in July 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Stockholm, Sweden, Atlas Copco AB is an international manufacturer of compressed air and gas equipment, generators, industrial tools and assembly systems, as well as a large variety of construction and mining equipment, also providing related aftermarket and rental services. Atlas Copco operates through its four business areas: Compressor Technique, Industrial Technique, Mining and Rock Excavation Technique and Construction Technique. The group generated sales of SEK94 in 2014. Atlas Copco is publicly listed and its largest shareholder, Investor AB (A1 stable), with around 17% stake as of 31 December 2014.

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.

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.

Martin Fujerik
Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Matthias Hellstern
Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

Moody's affirms Atlas Copco's A2/P-1 ratings; stable outlook
No Related Data.
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