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Moody's changes the rating outlook for Atlas Copco to positive

21 Dec 2011

Approximately US$ 2.2 billion of rated debt securities affected

Frankfurt am Main, December 21, 2011 -- Moody's Investor's Service today changed the outlook on Atlas Copco's ratings to positive from stable. At the same time the group's A3 senior unsecured and its Prime-2 short-term rating have been affirmed. The decision to change the outlook was prompted by the leverage and debt protection metrics that position Atlas Copco very strongly in the current rating category, which was helped by Atlas Copco's consistent generation of free cash flow over the last couple of years and the powerful recovery shown in 2010 and 2011.


The A3 / Prime-2 ratings reflect: (i) Atlas Copco's strong global market position in most of its operations and the resulting pricing power; as well as (ii) its high degree of operating flexibility and solid operational performance track record, which has driven strong and stable earnings and cash flow generation throughout the cycle despite the cyclicality of its end markets. The rating also takes into account: (i) the low sales visibility due to the shorter-cycle business portfolio, with a short lead time and low advance payments; (ii) the relatively high exposure to cyclicality as reflected in high sales volatility during the recent downturn, and (iii) high dividend payouts and -- from time to time -- the implementation of share redemption programs, as was just done in Q2 2011.

"The outlook change was triggered by the observation that Atlas Copco has largely strengthened its credit metrics ahead of general economic recovery through the cycle and is today much better prepared for worsening economic conditions than three years ago," said Oliver Giani, Vice President at Moody's and lead analyst for Atlas Copco. "Supported by a flexible cost structure and stable cash flow generation, our projections indicate that Atlas Copco will be able to achieve strong EBITA margins of at least 20% and maintain its current solid leverage level at around 1.3x Debt / EBITDA" added Mr. Giani. Credit metrics (RCF / Net debt and FCF / Debt), are now well in line with the thresholds set for an upgrade. Although FCF coverage has weakened currently (09/2011 LTM: 7.3%), it is considered to be of temporary nature, mainly driven by materially higher working capital consumption in line with strong revenue growth since 2010. We expect this to return to a much more moderate pattern going forward.

Driven by continued strong order intake in the first nine months of 2011 revenues increased by 17% in the first nine months of 2011. Despite a 14% decline in revenues during 2009, Atlas Copco was able to defend resilient EBITA margins of above 15%, which increased to 24.3% for the 12-month period ended in September 2011 on the back of strong volume growth and cost efficiency measures. Order intake in Q3 2011 has been a bit weaker than in the previous quarters, due to seasonal effects.

On the back of a strong cash flow generation and a continuous improvement in leverage (Net Debt / EBITDA) since Q2 2009, Atlas Copco distributed during 2011 a total of SEK11.6 billion (SEK4.8 billion dividend plus SEK6.1 billion mandatory share redemption plus SEK0.7 billion repurchase of own shares) to its shareholders. Although the distribution appears high on a first glance, it just brought leverage back to prior year's level (0.8x Net Debt / EBITDA, as reported). Going forward, we expect management to maintain a conservative financial policy.

Atlas Copco's short-term liquidity position is strong. The company's potential cash outflows for the 12 months period ending in September 2012, which amount to approximately SEK20 billion, mainly include working cash required to run the business and working capital needs (SEK3.5 billion), short-term debt maturities (SEK3.6 billion), capital expenditure (SEK3.6 billion), dividend payment (SEK5.8 billion) plus share repurchase (SEK743 million, to cover personnel stock option program), as well as spending on acquisitions (SEK2.4 billion). These potential cash outflows should be comfortably covered by liquidity sources of SEK24 billion, including available cash position of around SEK5.3 billion, estimated funds from operations of around SEK12 billion and an undrawn revolving multi-year credit facility of SEK6.4 billion with 6-years to maturity. The revolver represents a good quality source of liquidity as it doesn't contain any covenant or repeating MAC clause and 75% of the credit risk is guaranteed by EKN (the Swedish Export Credits Guarantee Board).

A rating upgrade could result over the next 6-12 months if currently achieved operating performance remains resilient and if the company can maintain (i) EBITA-margins in the mid to high teens, (ii) retained cash flow to net debt ratio above 40% on a sustainable basis, (iii) debt to EBITDA below 2x and (iv) a free cash flow to gross debt ratio above 10%. An upgrade would also require resilience in Atlas Copco's future order intake.

Contrary to expectations, Moody's would consider a rating downgrade, if (i) EBITA-margins weakened towards low double-digit digit values, (ii) retained cash flow to net debt consistently fell below 30%, (iii) debt to EBITDA increases towards 3x, (iv) the group strengthened its shareholder orientation permanently or (v) if the group were to pursue an aggressive acquisition strategy.

Moody's affirmed the following ratings on Atlas Copco AB and its following affiliates:

Senior Unsecured (domestic and foreign currency) ratings of A3

Senior Unsecured MTN (foreign currency) ratings of (P)A3

Commercial Paper ratings of P-2

Other Short Term (foreign currency) ratings of (P)P-2

The principal methodology used in rating Atlas Copco AB was the Global Heavy Manufacturing Rating Methodology published in November 2009. Please see the Credit Policy page on 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, and also provides related aftermarket and rental services. It operates in more than 170 countries and is considered the market leader in most of its business segments. The group generated sales of SEK78.3 billion (EUR8.5 billion) in the 12 months ended 30 September 2011 and employed around 33,000 people as of year-end 2010.


For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

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Please see the ratings disclosure page on for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

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

Oliver Giani
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Matthias Hellstern
Associate 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
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes the rating outlook for Atlas Copco to positive
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