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Rating Action:

Moody's changes Alstom's outlook to stable from positive

19 Feb 2020

Frankfurt am Main, February 19, 2020 -- Moody's Investors Service ("Moody's") has today affirmed Alstom's Baa2 long-term issuer rating, its Baa2 senior unsecured rating and the P-2 short-term commercial paper rating. Concurrently Moody's changed the outlook to stable from positive.

RATINGS RATIONALE

The change in Alstom's outlook to stable from positive was prompted by Alstom's announcement that it has signed a Memorandum of Understanding with Bombardier Inc. (Bombardier) and Caisse de dépôt et placement du Québec (CDPQ) in view of the acquisition of Bombardier Inc.'s (B3 negative) Transportation business (BT) for an equity value of €5.8bn to €6.2bn. Considering the existing uncertainties, predominantly regarding the required clearance from relevant regulatory authorities and anti-trust authorities being conditions to closing, which is expected in H1 2021, but also regarding Alstom's ability to turn-around BT's currently underperforming business, Moody's does not expect any more to be likely to consider an upgrade of Alstom's Baa2 ratings within the coming 12-18 months.

In detail, Moody's rating action balances (i) Alstom's improved competitive position post proposed transaction, (ii) expected synergies of approximately €400 million p.a. after 4 -- 5 years post-closing (Alstom's assumptions), (iii) the prudent funding of the acquisition with raising only up to €400 million of new debt (less than 7% of the entire transaction volume) as well as (iv) a secured liquidity with a new € 1.5bn RCF with (i) uncertainties regarding the approval from anti-trust authorities and possible conditions, which might diminish the strategic advantages of the transaction, (ii) execution and integration risks as well as uncertainties regarding Alstom's ability to turn-around BT's operating underperformance, (iii) the expected moderate increase in Alstom's leverage after the consolidation of BT's gross debt and other off-balance sheet items.

Moody's views the consolidation of the rail equipment sector as positive. After the proposed transaction, Alstom will have an order backlog of approximately €75 billion and revenues of around €15.5 billion. The group will benefit from a good regional complementary fit of the acquired activities. Furthermore, the increased scale will allow Alstom to better compete against CRRC Corporation Limited (CRRC, A1 stable) - that has annual revenues of around €30 billion of which around €20 billion in rail activities -- by benefitting from scale effects such as more efficient assembly, better procurement terms and stronger research and development capabilities.

The price for 100% of BT will amount €5.8bn to €6.2bn, paid via a mix of cash and new Alstom shares (increase in equity will cover approx. 86% of the transaction volume). CDPQ, which currently holds 32.5% in BT, will reinvest the entire proceeds from the BT sale (some €2 billion) and additional €0.7 billion in Alstom. After the proposed transaction CDPQ will be Alstom's biggest shareholder (approx. 18%) and will accept a 21-months lock-up period and a 22% standstill. We regard CDPQ as a long-term strategic investor, which can be assessed as credit positive. Additionally, Bouygues will remain an Alstom's important shareholder with holding around 10% of Alstom's equity. Alstom will reinforce its liquidity profile through a new €1.5bn Revolving Credit Facility with a five-year tenor with two one-year extension options replacing Alstom's and Bombardier Transportation's existing revolving credit facilities.

The proposed transaction is still subject to Extraordinary General Meeting's approval (majority of 2/3rd needed) and workers' council consultations. However, the most significant hurdle for the transaction will be the clearance from relevant regulatory authorities and anti-trust authorities. In early 2019 the planned merger of Siemens Aktiengesellschaft's (A1 stable) mobility division and Alstom was blocked by the EU commission due to competition concerns. If the BT acquisition will be approved by the relevant authorities this might come at the expense of conditions diminishing the strategic benefits from this transaction.

ESG CONSIDERATIONS

The proposed transaction will improve Alstom's competitive position in a market, which is benefiting from environmental and social drivers. The rail transportation segment is favorably positioned compared with other modes of transport in the light of the global commitment to reduce greenhouse emissions. This should support the longer-term growth expectation in Alstom's key segments and is therefore credit positive. Furthermore, Alstom's business is set to benefit from trends like urbanization and population growth, which will further drive the demand for urban and rail transportation systems.

The stable outlook is based on the expectation that Alstom will preserve leverage metrics in line with the requirements for the Baa2 rating category, which factors in the expected equity proportion of the upcoming takeover of BT and a timely integration and turnaround of the operations of BT.

WHAT COULD CHANGE THE RATING UP / DOWN

Upward pressure on the ratings would build, if (1) Alstom's EBITA margin moves towards high single digit levels, (2) leverage reduced sustainably below 2x Moody's-adjusted debt/EBITDA, (3) Moody's-adjusted Retained Cash Flow/Net Debt is in the 20%-30% range, and (4) Positive free cash flow (FCF) generation is above 10% of gross debt, on a sustained basis.

Downward pressure on the ratings would evolve, if after closing of the Bombardier Transportation acquisition the company fails to turn-around the acquired business or if the proposed rights issue won't be executed due to deteriorated market conditions, evidenced by (1) Alstom's EBITA margin moves sustainably below 6%, (2) Moody's-adjusted debt/EBITDA increases to above 2.75x on a sustained base, or (3) free cash flow was sustainably negative or the liquidity profile weakened.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Stephan Wulf
Vice President - Senior Analyst
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.
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