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Rating Action:

Moody's lowers Finmeccanica's senior unsecured debt rating to Ba1, from Baa3

19 Sep 2013

Rating outlook remains negative

New York, September 19, 2013 -- Moody's Investors Service downgraded to Ba1 from Baa3 the senior unsecured long-term debt ratings of Finmeccanica SpA and its guaranteed subsidiaries (Finmeccanica Finance SA and Meccanica Holdings USA, Inc.; taken together, "Finmeccanica" or the company). In conjunction with this rating action, Moody's assigned to Finmeccanica a Corporate Family Rating (CFR) of Ba1 and a Probability of Default Rating (PDR) of Ba1-PD. The rating outlook remains negative. This concludes Moody's review for possible downgrade of Finmeccanica's ratings which began 23 April 2013.

"The downgrade incorporates our expectation of a slower pace of improvement in Finmeccanica's overall operating performance and credit profile, particularly given some outsized constraints in certain areas, and even in consideration of pending asset sales and ensuing debt repayments with the net proceeds generated therefrom," according to Russell Solomon, Moody's Senior Vice President and lead analyst for the company.

Almost two years ago Finmeccanica undertook a comprehensive series of restructuring activities aimed at improving long-term profitability and cash flow generating ability. Over this same period, management has also been attempting to meet its market commitment to monetize EUR1 billion or more of non-core assets and thereby ease its heavy debt burden with a corresponding pay-down in loan outstandings. Although some progress has been made, Moody's believes that most of the targeted operational gains are now likely to take several more years to fully manifest. And for various reasons the targeted asset sales have also been extensively delayed. While the latter "one-time" credit enhancements related to asset dispositions were deemed important, the former, more fundamental and sustainable long-term operating improvements had been noted by Moody's as being more germane to Finmeccanica's ability to maintain an investment-grade rating profile.

Difficult market conditions characterized by increasing pressure on defense budgets, heightened competition and macroeconomic weakness in the company's core markets are expected to persist. This environment exacerbates the disruptive potential of ongoing challenges related to operating inefficiencies, contract disputes, and reputational and governance issues. These factors have been evidenced to at least some degree by the noteworthy recent slow-down in order rates.

"We now see the prospect of the company's ability to sufficiently strengthen and restore its credit profile such that key credit metrics evidence investment grade-rated characteristics on a fundamental stand-alone basis as much less likely over the next several years, and have subsequently revised Finmeccanica's ratings to reflect a credit profile that is more appropriately positioned in the Ba-rated range of credit risk on a comparative basis" noted Solomon.

RATINGS RATIONALE

Finmeccanica's key credit metrics remain weak, with profitability measures continuing to be adversely affected by significant restructuring-related charges that may still be pressured further. While the Helicopter division remains a strong performer and Aeronautics is broadly perceived to have considerable opportunity for improvement, revenues have been declining in the company's other core Defense Electronics and Security division. This reflects the challenging operating environment for defense contractors, broadly, and especially in the US and for Finmeccanica in particular given its above-average exposure to the Army and rapidly declining overseas contingency operations. Moreover, the planned asset dispositions that were to have effectuated an accelerated liquidity enhancement and balance sheet deleveraging have been very slow in coming. While governance issues have been at least partially addressed, the controlling shareholder influence of the Italian state continues to pose an apparent impediment to progress in this particular area. Additionally, it has become increasingly clear that the planned disposition of the Transportation segment as a whole is unlikely, even though this would have addressed one of the company's biggest problems by stopping the heavy cash burn of Ansaldo Breda and, in particular, off-loading the unprofitable legacy contracts. Further cash drain and disruption is expected given higher working capital consumption as new contracts are satisfied and in light of prospective incremental charge-offs following certain contractual disputes.

Macroeconomic headwinds—particularly in the company's core US, UK and Italian markets—and the impact of fiscal constraints on defense budgets are expected to persist and could weigh further on Finmeccanica's business and financial results. While Finmeccanica's firm-wide restructuring programs should continue to yield gradual improvements in operating performance, earnings and cash flows are likely to remain comparatively weak, with free cash flows in particular anticipated to be below levels previously expected.

Even so, these high-level risks continue to be somewhat mitigated by the large size and scope of the company's business operations, with more than EUR17 billion of revenue on a proportionally consolidated basis including various joint ownership arrangements. Finmeccanica remains a critical Tier 1 contractor on several important aerospace and defense platforms and a leading manufacturer of helicopters with a broad global installed base. The company continues to enjoy a diversity of revenue streams in both commercial and military applications, and reasonably high-level revenue predictability associated with its multi-year (albeit declining) backlog.

Finmeccanica also continues to benefit from a good liquidity profile, albeit one that is likely to be somewhat more strained over the forward period given significant normal-course working capital volatility that Moody's expects will be compounded by ramping production rates on several key programs. The company pre-financed most of its upcoming December 2013 bond maturity (EUR750 million remaining) late last year when EUR600 million of new debt was issued, and maintains a sizeable EUR2.4 billion revolving credit facility that remains available to support its volatile working capital needs.

Ongoing implicit support from the Italian sovereign state also notably lends support to Finmeccanica's ratings. Moody's continues to classify Finmeccanica as a Government Related Issuer. The Government of Italy (Baa2) controls Finmeccanica's Board of Directors and holds an approximate 30% economic interest in the company. Finmeccanica's current baseline credit assessment (BCA) of ba2 indicates Moody's view of stand-alone credit strength without extraordinary support from the sovereign. Moody's continues to view the level of default dependence between Finmeccanica and Italy as being moderate and to assume moderate potential for extraordinary support from the sovereign. The Ba1 CFR and senior unsecured debt ratings incorporate one-notch of upward lift from the ba2 BCA due to extraordinary support from the Government of Italy.

The negative outlook reflects heightened challenges in delivering needed operational improvements and executing asset disposals in view of the company's ongoing exposure to cuts in defense budgets across many European nations and in the US. Nonetheless, the ratings incorporate our expectation that tangible improvements in the company's credit profile will in fact be realized, with improved profitability, cash flow and return measures in particular increasingly evidenced over the longer term.

WHAT COULD CAUSE THE RATINGS AND/OR OUTLOOK TO CHANGE?

Finmeccanica's ratings could be lowered further if meaningful asset dispositions and follow-on debt repayments in accordance with expectations fail to be realized, and/or if prospects for achieving requisite improvements in financial performance diminish. Of particular note, the revised ratings do not reflect the company's status quo credit risk; rather, they continue to incorporate expectations of ongoing improvements in operating performance and related balance sheet strengthening over the forward rating horizon. Implicit in the revised ratings is an expectation that a strong liquidity profile will be maintained, operating margins will trend toward the high single-digit percentage range, free cash flow will grow from modestly positive levels towards several hundred million Euro, and financial leverage (Debt-to-EBITDA) will fall and remain below 4 times, all as measured on a Moody's-adjusted basis.

Although not expected over the immediate rating horizon, ratings could warrant consideration for potential upgrade (or more likely, stabilization of the rating outlook) upon evidence of more meaningful progress in the company's restructuring program at a pace that exceeds expectations, or possibly in conjunction with a stabilization of the Italian sovereign rating outlook. Ratings and/or the rating outlook could be favorably predisposed to a broad strengthening of underlying key credit metrics, as evidenced for example by consolidated operating margins sustained in the high single-digit range and Retained Cash Flow-to-Debt in the high-teen percentage range or better. These results would be indicative only and would have to be both sustainable and accompany the company's maintenance of a strong liquidity profile and a minimum two-year backlog of firm orders.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was the Global Aerospace and Defense Industry Methodology published in June 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009 and 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 is one of Italy's largest industrial conglomerates and receives approximately half of the country's annual defense outlays. With reported revenue of just over EUR17 billion for the last twelve-month period ended June 2013, Finmeccanica operates primarily in the defense electronics and aerospace (helicopters, aircraft) markets with interests also in the transportation (rolling stock, train signaling systems) and energy sectors.

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.

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's senior unsecured debt rating to Ba1, from Baa3
No Related Data.
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