MOODY'S AFFIRMS RHEINMETALL'S BAA3 RATING; OUTLOOK CHANGED (ENG)

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Moody's affirms Rheinmetall's Baa3 rating; outlook changed to negative 
Frankfurt am Main, November 16, 2012 -- Moody's Investors Service has 
today affirmed the Baa3 Long-Term Issuer Rating and P-3 Short-Term Issuer 
Rating of Rheinmetall AG as well as the Baa3 rating on Rheinmetall AG's 
EUR 500 million notes due 2017. The outlook on the ratings has been 
changed to negative from stable. 
RATINGS RATIONALE 
The outlook change to negative has been triggered by reduced earnings
expectations for Rheinmetall's defence business and reflects adjusted
leverage ratios that are weak for the Baa3 rating category against the
backdrop of a challenging market environment. The rating affirmation
reflects Rheinmetall's solid cash flow generation and Moody's view that 
Rheinmetall will likely be able to return to historical credit metrics. 
The affirmation further acknowledges that the increase in adjusted 
leverage ratios results also from an increase in pension obligations
owing to changes in the actuarial assumptions. 
On November 9th, Rheinmetall has trimmed its full year 2012 EBIT guidance 
to "approximately EUR 300 million". Previously, the company expected EBIT 
on the level of 2011, which was EUR 354 million. The reduction stems 
primarily from Rheinmetall's defence business. 
Rheinmetall now expects EBIT of its defence business to decline to EUR
170-180 million in 2012 (including a EUR 48 million one-off disposal 
gain and close to EUR 20 million of restructuring charges) from EUR 223 
million in 2011 (including income of EUR 11 million from a change of the 
consolidation scope). In contrast, management expects Rheinmetall's 
automotive business ("KSPG") to achieve full year EBIT at the level of 
2011 which was EUR 151 million. For the first nine-months of 2012 
Rheinmetall reported on group level EBIT of EUR 177 million after EUR 203 
million in 2011, including positive one-off items of EUR 48 million and 
EUR 11 million respectively. 
The rating affirmation, reflects Moody's expectation that the decline in 
earnings of Rheinmetall's defence business will be of temporary nature as 
governments currently seem to delay or reduce defence procurement orders 
in an effort to reduce overall spending. We positively note in this 
respect that order intake for the first nine months of 2012 has already 
increased by EUR 275 million compared to the prior year period, but 
caution that the near-term outlook remains uncertain due to budgetary 
constraints in a number of countries. In addition, we believe that 
Rheinmetall's automotive business may be challenged by an increasingly 
difficult market environment in Europe in 2013. These uncertainties 
combined with credit metrics that position Rheinmetall weakly at Baa3 
were the main reason for changing the outlook to negative while affirming 
the Baa3 rating. 
Moody's notes positively that despite the earnings decline, Rheinmetall's 
cash flow generation and reported net financial debt have improved in the 
current year thanks to lower working capital consumption. As of September 
2012, reported net financial debt amounted to EUR 594 million. This is 
above the December 2011 level of EUR 130 million because of the usual 
intra-year working capital swing of the defence business which typically 
reverses by year-end, but compares favorably to reported net financial 
debt of EUR 631 million as of September 2011. However, on a Moody's 
adjusted basis this improvement has been more than offset by an increase 
in Rheinmetall's pension obligations. As of September 2012 Moody's 
calculates a pensions adjustment to debt of EUR 678 million which 
compares to EUR 595 million as of December 2011. The main reason for this 
increase are changes to actuarial assumptions, primarily the decline in 
discount rates used to calculate the present value of future pension 
payments. 
For the last twelve months period ended on September 2012, Moody's
calculates debt/EBITDA of 3.9x and net debt/EBITDA of 3.7x on an 
adjusted basis. While Moody's expects net debt/EBITDA to reduce towards 
2.5x by year-end because of the usual release of working capital in the 
fourth quarter, we do not expect a material change in gross debt/EBITDA. 
Rheinmetall's RCF/net debt was 15% as of September 2012 which we expect 
to increase above 20% by year-end. These ratios position the rating
weakly in the Baa3 rating category. Since Rheinmetall finances most of 
its intra-year working capital needs from cash on hand rather than 
short-term borrowings, Moody's also calculates year-end debt/EBITDA based 
on a normalized cash position of EUR 300 million. However, we still 
expect such normalized debt/EBITDA ratio for 2012 to be only at or 
moderately above 3x. 
Moody's would consider a downgrade over the next 12-18 months if 
Rheinmetall's debt/EBITDA materially exceeded 3x based on a normalized
cash position of EUR 300 million at year-end without visibility that 
leverage can be reduced towards normalized debt/EBITDA close to 3x beyond 
2013. Likewise a failure to achieve RCF/net debt close to 25% or positive 
Free Cash Flow might result in a downgrade. In case Rheinmetall resumes 
plans to float KSPG and if Rheinmetall sold a majority share of KSPG, 
Moody's would most likely expect stronger metrics for the Baa3 rating 
category to compensate for the reduced business diversification. 
Positive rating pressure could result from a reduction of leverage to
levels of well below 2.5x debt/EBITDA. Prerequisites for an upgrade are 
(i) a positive earnings development of the defence division and (ii) 
material positive Free Cash Flow after dividends. In case Rheinmetall 
sold a majority share of KSPG, Moody's would most likely expect stronger 
metrics for the Baa3 rating category to compensate for the reduced 
business diversification. 
Moody's notes positively that Rheinmetall has generated positive Free 
Cash Flow of EUR 82 million during the last twelve months period ended on 
September 2012 and that its liquidity profile remains adequate which is 
reflected in the Baa3 rating affirmation. 
The principal methodology used in rating Rheinmetall AG was the Global
Automotive Supplier Industry Methodology published in January 2009.
Please see the Credit Policy page on www.moodys.com for a copy of this 
methodology. 
Rheinmetall AG, established in 1889 and headquartered in Duesseldorf,
Germany, is a leading European player in defence equipment ("Defence"
48% of group revenues) and, through its 100% subsidiary KSPG AG 
("Automotive" or "KSPG"), a first-tier supplier of automotive components 
(52% of group revenues). In 2011, Rheinmetall generated total revenues of 
EUR4.5 billion. Although the company is expanding outside Europe, it 
still generates the majority of its revenues and profits in its European 
home market. Rheinmetall AG is publicly listed with 100% of shares in 
free float. Plans to publicly list KSPG remain a strategic option but 
have been put on hold for the foreseeable future because of market 
conditions. 
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MatthiasHellstern
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