Moody’s Investors Service cut its long-term credit rating for Rolls-Royce Holdings from “A3” to “Baa1,” citing the company’s high leverage levels, weak cash flows, and need to resolve issues related to the cracking blades of the Trent 1000 aircraft engines.
In a report, the ratings agency said the downgrade reflects the “expectation that target free cash flow in 2019 will include working capital gains, which are not considered sustainable.” It said free cash flow targets for the rest of this year and 2020 relied on “favorable working capital improvements.”
Rolls-Royce had negative free cash flow in the first half of 2019, due primarily to the timing of engine deliveries.
Moody’s said its outlook for the jet engine maker was raised to “stable” from “negative.”
Rolls-Royce’s leverage levels were 5.3 times earnings, Moody’s said.. They were not expected to drop below 4 times earnings in the next 18 months.
“The company has made several important steps towards improving longer term performance,” Moody’s said, “including reducing the losses on the sale of large commercial engines, whilst achieving strong growth in commercial engine after-market revenues and in power systems.”
Last week, Rolls-Royce reported in-service cost estimates related to the Trent 1000 brought a cash cost of £219 million ($268 million) in the first half of 2019, versus £107 million in the same period last year.
The company predicted the cash cost will incrementally increase to a total of £450 to£500 million for the full year but then decrease by £50 to£100 million in 2020.
The Trent 100 engines’ cracked blades continue to ground Boeing 787 Dreamliners. Yesterday, parts from the engine fell from the sky over an Italian town after a Norwegian flight took off from Rome.
The company said it has spent $120 million to prepare for the possible impact that a no-deal Brexit from the European Union.
“We would obviously prefer a deal because that is the best way of providing certainty for business but we’ve always been prepared for a no-deal of some kind,” chief executive officer Warren East said in an interview on BBC Radio.
East said the company has grown its inventory and taken other measures “to deal with issues around Brexit.”
The company’s shares were down more than 4% Monday morning.
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