Approximately EUR 6.3 billion of debt affected
New York, October 05, 2011 -- Moody's Investors Service has today downgraded to Baa2 from A3 the long-term
issuer ratings of Finmeccanica SpA and its subsidiaries, including
DRS Technologies, Inc., Finmeccanica Finance S.A.
and Meccanica Holdings USA, Inc. (collectively, Finmeccanica
or the company). The outlook for all ratings is stable.
Today's rating action concludes Moody's review for downgrade,
as initiated 20 June 2011.
This is one of several rating actions on Italian government-related
issuers (GRIs) which are being announced separately.
RATING RATIONALE
RATIONALE FOR DOWNGRADE
Today's rating action follows Moody's downgrade of the rating
of the government of the Republic of Italy to A2 with a negative outlook,
from Aa2. For full details please refer to http://www.moodys.com/research/Moodys-downgrades-Italys-government-bond-ratings-to-A2-with-a--PR_227333.
In addition to weakened sovereign creditworthiness, Finmeccanica's
standalone credit quality has also deteriorated, and Moody's
has subsequently lowered the company's Baseline Credit Assessment
(BCA) (on a scale of 1 to 21, where 1 represents the lowest credit
risk) to 10 (or Baa3-equivalent) from 9 (or Baa2-equivalent).
The one-notch reduction in Finmeccanica's BCA reflects operating
performance and credit metrics that continue to lag Moody's expectations
and have persisted since the company leveraged up to buy DRS Technologies
(DRS) at the end of 2008. Moreover, Moody's notes particular
concern with respect to recent financial results, with evidence
of accelerating adverse trends in the company's Defence Electronics
and Aeronautics business lines now also negatively impacting margins and
exacerbating longer-term restructuring needs related to its Transport
rolling stock operations. The company's key credit metrics
are suggestive of a more modest credit profile, more akin to companies
in the Ba1-to-Baa3 rating range, with Debt-to-EBITDA
of 4.2 times and EBIT-to-Interest of 2.3 times
(both on a trailing 12-month basis for the period ended 30 June
2011). Moody's believes that Finmeccanica's firm-wide
restructuring programme should yield improved operating performance over
the next couple of years. However, earnings and cash flows
are likely to remain weak over the interim period, with free cash
flows anticipated to be well below historical levels. Implicit
in the stable outlook is an acknowledgement that free cash flow may benefit
from reduced tax payments and a possible curtailment of shareholder dividends
while the restructuring proceeds in order to mitigate an otherwise cash-absorptive
profile.
Finmeccanica recognises the current business challenges and has begun
a firm-wide restructuring programme to address process and cost
inefficiencies in certain lower-performing business units:
primarily concentrated in Transportation, Aeronautics, and
Defence Electronics. Moody's believes that the plan,
while aggressive in its attempt to address structural challenges as a
means to establishing a more firm base for future growth, will likely
take some time to fully implement and is not without risk in terms of
its ability to achieve satisfactory results. In addition,
there will likely be some resistance in implementing certain elements,
particularly in the areas of cost restructuring stemming from political
and/or labour pressures. However, the restructuring plan
could result in additional divestitures beyond what has already been achieved,
the proceeds from which Moody's expects would be applied to debt
reduction and could thereby provide a somewhat accelerated improvement
in the company's credit profile.
With about 30% of its shares owned by the Italian government,
Finmeccanica is a GRI. The company's Baa2 long-term
rating is a function of (1) a BCA of 10 (Baa3 equivalent); (2) the
default risk of the supporting government (Italy is now rated A2/negative);
(3) the perceived strong and continued likelihood of government support
(primarily because of the key role that Finmeccanica plays in providing
defence-related products to the Italian government); and (4)
the moderate default dependence between Finmeccanica and Italy (principally
due to the global breadth of Finmeccanica's revenue base).
RATIONALE FOR STABLE OUTLOOK
Despite the negative outlook for the Italian sovereign, the stable
outlook for Finmeccanica reflects Moody's belief that the company
will ultimately be successful in effecting a substantial amount of restructuring
within its business operations, and thereby improve its creditworthiness
over the interim period. Of particular note is the company's
solid liquidity position (with significant cash balances and a large,
EUR2.4 billion undrawn revolving credit facility), a sizeable
backlog (at more than twice annual revenues) and limited near-term
maturities that are deemed to collectively afford management the time
and thereby the opportunity to address problem areas. Finmeccanica's
large size (with more than EUR18 billion of revenues), its position
as a prime defence contractor and tier-one supplier to critical
aerospace platforms (B787, Eurofighter), and as a leading
manufacturer of helicopters with a broad global installed base,
along with its diverse revenue streams in both commercial and military
applications, all lend support to an investment-grade credit
profile.
WHAT COULD CHANGE THE RATING UP/DOWN
The inability to restore consolidated operating margins to the high single-digit
level as the restructuring initiatives are completed could negatively
impact the rating and/or outlook. In particular, Defence
Electronics and Aeronautics operating margins that fail to progress towards
low double-digit and high single-digit levels, respectively,
could cause downward rating pressure. A lack of progress towards
debt reduction, through application of free cash flows and/or additional
divestitures, could also exert downward pressure on the rating.
Other factors that could cause the rating to be downgraded include:
reduction in Alenia Aeronautica's business from Boeing due to supplier
concerns, poor execution of the backlog, loss of a major defence
contract for which costs are not recoverable, Debt-to-EBITDA
sustained above 3.5 times and Retained Cash Flow-to-Debt
below 15%.
Although unlikely in the intermediate term, Moody's could
consider upgrading the rating if Finmeccanica reports a consolidated operating
margin that is sustainable above 10%, an improving return
on capital (EBITA-to-Average Assets) of 11% or better,
and Retained Cash Flow-to-Debt rising to the high-20%
range, with a continued focus of business operations around the
three core units of defence electronics, aviation and helicopters.
The principal methodology used in rating Finmeccanica was the Global Aerospace
and Defense Industry Methodology published in June 2010. Other
methodologies used include the Government-Related Issuers methodology
published in July 2010. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
Headquartered in Rome, Finmeccanica SpA is one of Italy's largest
industrial conglomerates and receives about half of Italy's annual defence
outlays. Finmeccanica is concentrated in the defence electronics
and aerospace (helicopters and aircraft) markets and has interests in
the transportation (train signalling systems) and energy sectors.
The company reported revenues of around EUR18.5 billion for the
12 months ended 30 June 2011.
RATINGS LIST
Downgrades:
..Issuer: Finmeccanica S.p.A.
....EUR 2.6 Billion Gtd Senior Unsecured
Medium-Term Note Program, Downgraded to (P)Baa2 from (P)A3
..Issuer: Finmeccanica Finance S.A.
....EUR 600 Million Gtd Senior Unsecured Eurobonds,
Downgraded to (P)Baa2 from (P)A3
....GBP 400 Million Gtd Senior Unsecured Medium-Term
Notes, Downgraded to Baa2 from A3
....EUR 2.0 Billion Gtd Senior Unsecured
Medium-Term Notes, Downgraded to Baa2 from A3
..Issuer: Meccanica Holdings USA, Inc.
....US$ 1.3 Billion Gtd Senior
Unsecured Global Notes, Downgraded to Baa2 from A3
..Issuer: DRS Technologies, Inc.
....US$ 12.0 Million Gtd Senior
Unsecured Global Notes, Downgraded to Baa2 from A3
Outlook Actions:
..Issuer: Finmeccanica S.p.A.
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: Finmeccanica Finance S.A.
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: Meccanica Holdings USA, Inc.
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: DRS Technologies, Inc.
....Outlook, Changed To Stable From
Rating Under Review
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are considered EU Qualified
by Extension and therefore available for regulatory use in the EU.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
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 www.moodys.com.
Information sources used to prepare the rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
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
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and cannot in every instance independently verify or validate information
received in the rating process.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
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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.
Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
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SUBSCRIBERS: 212-553-1653
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
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Moody's downgrades Finmeccanica to Baa2; outlook stable (Italy)
