New York, July 16, 2012 -- Moody's Investors Service has today placed on review for downgrade the Baa2 ratings of Finmeccanica SpA (Finmeccanica) and its guaranteed subsidiaries Finmeccanica Finance SA and Meccanica Holdings USA, Inc.
Today's action follows the weakening of the Italian government's creditworthiness, as captured by Moody's downgrade of Italy's government bond ratings to Baa2 on 13 July 2012. For more details on the sovereign action, please refer to the press release on www.moodys.com.
"The review reflects our increased concerns about (1) Finmeccanica's ability to successfully execute its operational restructuring and asset disposition plans in a more challenging economic environment, and (2) the implicit level of support for the company from the Italian government," says Russell Solomon, a Moody's Senior Vice President and lead analyst for Finmeccanica. Finmeccanica currently carries a fundamental baseline credit assessment, or BCA, of 10 (Baa3 equivalent level), with its rated debt elevated by one notch to Baa2 in accordance with Moody's Government Related Issuer Methodology.
Finmeccanica's key credit metrics have been weak for the rating category, with high financial leverage and poor profitability measures. The company's performance has been adversely affected by significant restructuring activities and related financial accounting charges as the company tries to reduce inefficiencies and improve core profitability. Moody's believes that the deteriorating macroeconomic environment both in Italy and in the broader European markets could further weigh on Finmeccanica's business and financial results and renders more uncertain its ability to achieve anticipated proceeds from asset disposals.
The company generates around 20% of its sales within Italy, a substantial portion of which are defence-related. The budget for the Italian Ministry of Defence has been under increasing pressure for the past year and may be subject to further cuts, notwithstanding reports of a planned reversion to higher levels (or at least stabilisation) beginning 2013. Compounding in-country headwinds is Finmeccanica's heavy exposure to defence spending levels for the whole of continental Europe, and the US and UK more broadly, which are also experiencing meaningful downward pressure. These high-level risks have been somewhat mitigated to date by the large size and scope of the company's business operations, and specifically the revenue predictability associated with its multi-year backlog, as well as its good liquidity profile.
Finmeccanica has proposed approximately EUR1 billion of asset sales to be executed by the end of 2012, the proceeds from which would be applied to debt reduction. However, with increasingly difficult market conditions, Moody's believes that the timing, value and ultimate execution of prospective asset sales is subject to heightened risk. Moreover, requisite credit profile strengthening also relies heavily on consistent improvement in operating performance that may be more difficult to realise given expectations of increasingly challenging market conditions.
The review will assess Finmeccanica's near-term ability to reverse recent negative operating performance trends and restore its credit profile to levels more appropriate for its assigned rating category. The review will also focus on the pace and scope of Finmeccanica's various restructuring activities and targeted monetisation of non-core assets and their potential short-to-medium term impact on the company's financial profile.
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 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 defence outlays. Finmeccanica is concentrated in the defence electronics and aerospace (helicopters and aircraft) markets and has interests in the transportation (train signalling systems) and energy sectors. The company reported revenues of just over EUR17 billion for the 12 months ended 31 March 2011.
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Russell Solomon Senior Vice President Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Michael 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 StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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