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Rating Action:

Moody's places Finmeccanica ratings (Baa3 Sr Unsec) on review for possible downgrade

23 Apr 2013

New York, April 23, 2013 -- Moody's Investors Service placed the ratings of Finmeccanica SpA (Finmeccanica) and its guaranteed subsidiaries (Finmeccanica Finance SA and Meccanica Holdings USA, Inc.; taken together "Finmeccanica" or the company) on review for possible downgrade.

"The review considers that current ratings may no longer be sustainable given indications of weaker than anticipated financial performance in recent periods and weaker prospects for several key defense markets over the forward rating horizon," according to Russell Solomon, Moody's Senior Vice President and lead analyst for the company. "Our review will focus on the company's ability to realize targeted proceeds from asset dispositions on a timely basis and to meaningfully improve its financial position through ensuing balance sheet deleveraging as well as the realization of operating efficiencies that strengthen profitability and cash flow generation following ongoing restructuring initiatives," added Solomon.

RATINGS RATIONALE

Finmeccanica's current financial profile is weaker than expectations for the rating category. The company's profitability and cash flow generation have been affected by pressure on margins. The company today reported results for 2012, which are also adversely impacted by significant charges related to ongoing restructuring efforts. Revenue has notably been declining in the company's important Defense Electronics and Security division (which comprises about one-third of consolidated group revenue) owing to the challenging operating environment for defense contractors, especially in the United States—a phenomenon we expect to at least persist if not worsen further. As a result, Moody's is concerned that Finmeccanica's comprehensive restructuring program may not culminate in the level of improvement previously anticipated due to weak macroeconomic conditions and heightened pressure on defense budgets in Italy and other European markets, as well as the US.

In 2011, the company announced its intention to sell certain assets, targeting proceeds approximating EUR1 billion by the end of 2012 with ensuing balance sheet deleveraging to follow. For various reasons, these divestitures have not yet been realized. However, we continue to believe that near-term non-core asset dispositions are likely to yield at least EUR500 million in net proceeds, in addition to approximately EUR260 million from the already negotiated Avio disposition.

The company's solid liquidity position should continue to provide Finmeccanica with time to implement its restructuring program on an orderly basis and to realize ensuing operational improvements, efficiency savings and better margins. Finmeccanica's credit profile is supported by its large size and scope of business operations, with the high-level of perceived revenue predictability associated with its multi-year backlog also lending support to ratings. Moreover, ongoing implicit support from the Italian sovereign state also continues to be incorporated in the company's ratings. Against the backdrop of a worsening operating environment, however, the review for possible downgrade indicates Moody's view that there is greater uncertainty with respect to the company's ability to fully restore key credit metrics to minimum requisite levels sufficient to preserve current ratings. The review will also assess the strength of Finmeccanica's governance following changes in the company's board of directors.

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 baa3 indicates Moody's view of stand-alone credit strength without extraordinary support from the sovereign. The rating review will consider whether the BCA should be lowered. 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 Baa3 senior unsecured debt rating does not incorporate any upward lift from the baa3 BCA due to extraordinary support from the government of Italy.

Finmeccanica's ratings could be downgraded if meaningful asset dispositions continue to fall behind their expected pace or if Moody's lowers its assessments for the pace and magnitude of improvement in financial performance, which results in a lower BCA. Among other considerations, for the Baa3 rating to be maintained at the conclusion of the review, Moody's would need to perceive a high likelihood that the company will be able to improve its operating margins and free cash flow (both estimates to incorporate Moody's standard adjustments) such that they trend to at least 8% and EUR400 million, respectively. Diminished expectations for achieving a financial leverage target trending towards 3 times or better on a Moody's-adjusted Debt-to-EBITDA basis over the intermediate term could also result in a downgrade.

PRINCIPAL METHODOLOGY

The principal methodology used in rating Finmeccanica was the Global Aerospace and Defense Industry rating methodology, published in June 2010. Other methodologies used include the Government-Related Issuers rating 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 and aerospace (helicopters, aircraft) markets and has interests in the transportation (rolling stock, train signaling systems) and energy sectors. The company reported revenues of just over EUR17 billion for the 12 months ended December 2012.

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.

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 places Finmeccanica ratings (Baa3 Sr Unsec) on review for possible downgrade
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