13th Aug 2019 08:28
(Alliance News) - Moody's Investors Service downgraded the credit rating for Rolls-Royce Holding PLC citing weak cash flow and high leverage levels at the jet engine maker.
The credit analyst downgraded the long-term debt rating for the FTSE 100-listed firm to Baa1 from A3 previously. The outlook was boosted to Stable from Negative.
Moody's downgraded the rating for Rolls-Royce amid adjusted leverage levels sitting at 5.3 times earnings, with the credit analyst not expecting this to fall below 4.0 times over the next year to year-and-a-half.
The high cost of rectifying issues with the cracking blades of the Trent 1000 aircraft engines, as well as "limited" free cash flow also worried Moody's.
Moody's indicated that free cash flow in the first half of 2019 was "negative" with an outflow of GBP391 million reported from the core business largely due to timing of engine deliveries. Meanwhile, the credit analyst said current free cash flow targets for 2019 and 2020 were not "sustainable" as they relied "mainly" on "favourable working capital movements."
Rolls-Royce has guided for free cash flow of GBP700 million and GBP1 billion in 2019 and 2020. Moody's believes GBP600 million to GBP800 million of the 2019 cash flow will be due to working capital gains, with 2020 figures likely to "rely" on further inventory reductions.
Moody's explained the A3 rating previously accorded to Rolls-Royce had been based on the assumption of leverage levels experiencing "significant reductions" and cash flow hitting company targets without short-term working capital gains.
Despite this, Moody's emphasised Rolls-Royce had high barriers to entry and a "strong" order book which also was supported by a "positive" outlook for its core aerospace and defence end markets as well as some of its niche power segment markets.
Roll-Royce is committed to a strong financial profile and has "strong liquidity", Moody's said, with GBP4.5 billion in cash and GBP2.5 billion in undrawn bank facilities.
Shares in Rolls-Royce were 1.9% lower at 738.00 pence in London on Tuesday.
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