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Rating Action:

Moody's lowers Finmeccanica debt rating to Baa3; Outlook stable

25 Oct 2012

New York, October 25, 2012 -- Moody's Investors Service lowered the senior unsecured debt ratings of Finmeccanica SpA and its guaranteed subsidiaries Finmeccanica Finance SA and Meccanica Holdings USA, Inc. (taken together, Finmeccanica or the company) to Baa3, from Baa2, concluding the rating review initiated 16 July 2012. Moody's noted, however, that the company's baa3 Baseline Credit Assessment (BCA)—which represents the rating agency's opinion of Finmeccanica's stand-alone intrinsic strength absent any extraordinary support from the Italian government—remains unchanged at baa3. The rating outlook is stable.

The rating action reflects Moody's downgrade of Italy's government bond ratings to Baa2 on 13 July 2012, and a correspondingly weaker level of implicit support for Finmeccanica, in accordance with Moody's Government Related Issuer Methodology. Additionally, Moody's reiterated the ongoing challenges associated with Finmeccanica's comprehensive restructuring program, deteriorating macroeconomic conditions and heightened pressure on defense budgets in the company's principal operating markets—the US, Italy and Europe, more broadly. Notwithstanding these risks, "maintenance of the baa3 BCA reflects our expectation that Finmeccanica will successfully effect targeted dispositions and operational improvements such that financial metrics will be restored and better aligned with the company's fundamental business profile more solidly at investment-grade levels over the forward 18-to-24 month rating horizon," noted Russell Solomon, Moody's Senior Vice President and lead analyst for the company. The stable rating outlook considers the company's strong liquidity profile and the benefit of ongoing sovereign support as the company proceeds with its restructuring initiatives.

RATINGS RATIONALE

Finmeccanica's key credit metrics have been very weak for the rating category and remain as such, with high financial leverage and poor profitability measures. The company's performance has been adversely affected by significant restructuring activities and related financial accounting charges as new management undertakes more stringent measures to reduce inefficiencies and improve core profitability. Revenues continue to decline in the Defense Electronics and Security division (about one-third of total sales), although the Helicopter division remains a strong performer and Aeronautics has considerable runway in front of it. The group has proposed approximately EUR1 billion of asset sales (from civil-related activities and monetization of non-strategic partnerships) to be executed by the end of 2012, the proceeds from which would be applied entirely to debt reduction. While Moody's believes macroeconomic headwinds and the impact of fiscal constraints on defense budgets could weigh further on Finmeccanica's business and financial results, recent and expected improvements in order rates and profitability measures suggest more favorable near-term trends. And, "while it may take modestly longer to monetize non-core assets and may result in modestly weaker asset sales proceeds than initially targeted, we believe dispositions will occur at levels sufficient to effect a meaningful reduction in financial leverage and subsequent strengthening of the company's balance sheet," added Solomon.

The company generates around 20% of sales within Italy, a substantial portion of which are defense-related. The budget for the Italian Ministry of Defence has been under increasing pressure for the past year and may be subject to further cuts, notwithstanding a planned reversion to higher levels beginning 2013 and continuing in 2014. Next year's election adds further uncertainty. Compounding in-country difficulties is Finmeccanica's heavy exposure to defense spending levels for the whole of continental Europe, and the US and UK more broadly, all of which are experiencing meaningful downward pressure. These high-level risks have been somewhat mitigated to date by the large size and scope of the company's business operations, the revenue predictability associated with its multi-year backlog, and a solid liquidity profile (albeit also subject to uncertainty given significant working capital volatility, particularly as it relates to the highly concentrated in-country cash collections that occur around fiscal year-end).

Finmeccanica's rating incorporates application of Moody's Government Related Issuer Methodology. With the sovereign rating for the government of Italy at Baa2 (negative outlook), however, and a deemed moderate level of default dependence and moderate (as revised from strong, previously) underlying support from the same, Finmeccanica's fundamental benchmark credit profile (as reflected in Moody's baa3 Baseline Credit Assessment) does not garner sufficient lift to warrant a higher debt rating. Hence, Finmeccanica's senior unsecured rating no longer gets any sovereign related lift in arriving at its final Baa3 senior unsecured debt rating. There continues to be an implicit level of support from the sovereign state, nonetheless, as captured in the stable rating outlook for Finmeccanica's debt.

Ratings could come under downward pressure if steady operational improvements are not evidenced, with demonstrated progress towards a return of operating margins to the 8% level or better and free cash flow approaching EUR400-500 million over the intermediate term. We also anticipate margins in the Defense Electronics and Aeronautics divisions specifically trending towards low double-digit and high single-digit operating margins, respectively. In addition, Moody's would consider further negative rating action(s) if targeted asset dispositions (and debt pay-downs with resultant asset sale proceeds) are not successfully completed largely in accordance with stated objectives over the near-term, with ensuing leverage trending towards 3 times or lower on a Moody's-adjusted Debt-to-EBITDA basis over the intermediate term. Any unexpected adverse developments with respect to the company's liquidity profile, including curtailment of revolver availability and/or meaningful reduction of excess cash balances could also impose a further negative rating bias.

Although it is unexpected over the immediate rating horizon, ratings could warrant consideration for potential upgrade upon evidence of meaningful progress in the company's restructuring program, coupled with stabilization of the Italian sovereign rating. Ratings could be lifted if Finmeccanica's consolidated operating margin is sustained above 10%, returns on capital (EBITA-to-Average Assets) improve to 10% or better, and Retained Cash Flow-to-Debt approaches the high-20% range or more. These results are indicative only and would have to be sustainable and accompany maintenance of a strong liquidity profile and a minimum two-year backlog of firm orders.

Please see the subsequent credit opinion update for Finmeccanica on Moody's website (www.moodys.com) for further information.

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, Italy, Finmeccanica SpA is one of Italy's largest industrial conglomerates and receives approximately half of the country's annual defense outlays. Finmeccanica is concentrated in the defense electronics/systems and aerospace (helicopters, aircraft) markets, with interests also in the transportation (train signaling systems), space and energy sectors. The company reported revenues approximating EUR17 billion during the 12 months ended 30 June 2012.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. 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 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.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com 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.

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 before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's lowers Finmeccanica debt rating to Baa3; Outlook stable
No Related Data.
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