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.
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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