Fitch Ratings has affirmed Rolls-Royce Holdings plc's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'A'. The Outlook on the Long-Term IDR is Stable.
The affirmation reflects the company's recent and expected financial performance meeting Fitch's expectations and in line with the 'A' rating. Earnings and cash flows in 2015 are likely to be somewhat lower than in 2014, but we expect restructuring measures to lead to a recovery of key metrics over the medium term. In particular, short-term pressure on credit metrics driven by transition to new programmes and weakness in the marine division will be limited by the suspension of the £1bn share buyback programme at only £500m. The rating will face pressure if the company's free cash flow generation does not return to historical levels from around 2018, in line with our expectations of position in the product life cycle.
Rolls-Royce has had a continuously stable financial performance, says Fitch. Despite the weaker outlook for some of the company's non-aerospace end-markets such as oil and gas and marine, Fitch expects the company's overall credit profile to be only slightly affected, and that it will maintain a financial profile broadly consistent with the rating. Earnings and cash flows in 2015 are likely to be lower than in 2014, but Fitch expects restructuring measures to lead to a recovery of key metrics over the medium term.
Cash flow is likely to see only a limited improvement over the coming two to three years as new programmes are launched and ramped up while production rates of the mature Trent 700 slow prior to the introduction of its replacement, the Trent 7000.
The October 2015 £1.5bn bond issuance has increased Fitch’s expectations of YE15 gross adjusted debt to £4.6bn from £3.7bn at YE14. This bond issuance provides additional liquidity over the upcoming cash absorption period but stresses expectations of FFO gross adjusted leverage at YE15 to around 2.7x from 2.0x at YE14. This is beyond out negative rating guideline of 2x until cash generation builds after the investment period.
Fitch added that the suspension of the £1bn share buyback programme at only £500m provides some additional headroom to maintain the company's financial metrics as it enters a period of cash absorbing programme launches and growth. In particular, the savings helps fund some of the lost earnings resulting from reductions in Trent 700 build rates over the next three years.
Rolls-Royce derives about half its turnover from the commercial aerospace industry, where the outlook for engine deliveries and service work remains positive, says Fitch. The production of large commercial aircraft - and the engines the company manufactures for them - is set to increase in the short to medium term, reflecting the strength and quality of the order book.