December 29, 2017 / 9:33 AM / a year ago

Fitch Assigns First-Time IDR of 'BB+' to GKN Aerospace Services Limited; Outlook Stable

(The following statement was released by the rating agency) LONDON/WARSAW, December 29 (Fitch) Fitch has assigned an Issuer Default Rating (IDR) of 'BB+' to GKN Aerospace Services Limited (GASL). The Outlook on the IDR is Stable. The rating is based on the application of Fitch's parent and subsidiary linkage criteria, using a top-down approach which leads to the rating of GASL being one notch below that of its parent, GKN Holdings (BBB-/Stable). The strength of the links between GKN Holdings and GASL is based on the strong operational and strategic ties, exemplified by GASL's importance to the group as the sole aerospace entity within the group in the UK, common management control, and a centralised treasury. These factors are offset by weak to moderate legal ties, which lead to the one notch differential between the two entities. KEY RATING DRIVERS Strong Linkage: The rating of GASL is one notch below that of its parent, GKN Holdings (BBB-/Stable) based on Fitch's parent and subsidiary linkage criteria. The links are deemed strong based on strong operational and strategic ties, offset somewhat by weak to moderate legal ties as GASL receives no written guarantees from GKN Holdings in relation to any of its obligations. 'BB' Category Standalone Rating: GASL's standalone rating profile is at the low end of the 'BB' category as a result of a rather weak business profile being offset by a reasonable cash-flow profile. GASL has a moderate market position, but its overall business profile is weakened by the company's small scale, significant reliance on one important customer, little geographic diversification and its significant exposure to the commercial aerospace industry. Good and Stable Cash Generation: GASL's cash flows are indicative of an investment-grade aerospace and defence company, with the funds from operations (FFO) margin at a consistently strong level as a consequence of a good maturity mix of aircraft programmes, aided by no financing costs. The free cash flow (FCF) is somewhat more volatile, although still positive in most years, as a result of working-capital swings and capex needs, both of which are driven by programme investment needs, which can be lumpy. Simple Capital Structure: GASL has no authority to borrow funds externally (other than some operating leases) and relies solely on the group's centralised cash pooling arrangements for its operating cash needs. As a consequence, capital structure factors such as leverage are not material elements in the assessment of the standalone credit profile. In line with the agency's criteria, Fitch does not treat the company's pension plan liability as debt, but does analyse the cash contributions to, and service costs related to, its pension plans. Positive Aerospace Market Outlook: The global sector outlook for aerospace and defence (A&D) is positive, with most sector indicators such as aircraft deliveries, aircraft finance availability, and defence expenditures supporting the outlook. Fitch Ratings expects large commercial aircraft deliveries in 2018 to rise by 7% and by at least 8% in 2019. Spending in addressable defence markets should rise at or above global GDP growth in 2018. The favourable outlook in these key markets offsets political and trade risks, new aircraft and engine programme ramp-ups, and business jet sector weakness. DERIVATION SUMMARY GASL's rating is based on Fitch's parent and subsidiary linkage methodology and is notched down by one notch from the ratings of the parent entity GKN Holdings (BBB-/Stable), due to the strong links between the two, exemplified by the strategic importance of GASL to the group, common management control and the operational ties, such as a centralised cash pooling arrangement. GASL's standalone rating profile is at the low end of the 'BB' category. Although its FFO margins are comparable to peers' such as MTU Aero Engines AG (BBB-/Stable), Orbital ATK, Inc. (BB+/RWP), L-3 Technologies (BBB-/Stable) and Harris Corporation (BBB-/Positive), GASL has more volatile FCF margins and narrower customer and geographic diversity. KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer are: - no change to the relationship between GKN Holdings and GASL; - single-digit turnover decline in 2018, low single-digit growth in 2017 and over 2019-2020; - operating margin of 6% in 2020; - average capex intensity of 5.3% over 2017-2020; - moderate increase in net financial liabilities held for trading (fair value of forward foreign-currency derivative contracts); - cash pension contribution of GBP20 million each year. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action: - Strengthening of the legal ties between GKN Holdings and GASL - GASL's IDR could be upgraded if GKN Holdings plc is upgraded Developments That May, Individually or Collectively, Lead to Negative Rating Action: - Looser ties between GKN Holdings and GASL - GASL's IDR could be downgraded if GKN Holdings plc is downgraded LIQUIDITY Liquidity Supported by Parent: GASL's FFO has been sufficient to cover working-capital outflows over the past four years. This has led to positive cash flow from operations (CFO) generation, which has been sufficient to cover capex in most years. We expect GASL to continue to generate positive FCF. GASL's liquidity is further supported by access to the group's centralised liquidity arrangements, which can be used to fund GASL's operating cash needs. GASL has no bank or capital-market debt outstanding and no access to other facilities such as factoring lines. Contact: Principal Analyst Aurelien Jacquot Associate Director +33 144 299 137 Supervisory Analyst Tom Chruszcz Director +48 22 338 6294 Fitch Polska Krolewska 16 Warsaw 00 - 103 Committee Chairperson Paul Lund Senior Director +44 20 3530 1244 Date of Relevant Rating Committee: 21 December 2017. Summary of Financial Statement Adjustments - - A multiple of eight times is used in relation to the company's operating lease expense in order to calculate the liability Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Exposure Draft: Corporate Rating Criteria (pub. 14 Dec 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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