Moody’s downgraded its Rolls-Royce (RR.) long-term senior unsecured debt rating rating from A3 to Baa1, as the agency cited the aerospace engineer’s low free cash flow generation and the “unsustainable” working capital improvements it will need to meet its cash flow targets.
Rolls-Royce is currently spending to resolve its stricken Trent 1000 engine programme, which was plunged into fresh crisis after a Trent 1000-powered Norwegian Air plane scattered engine parts over a Roman suburb on 10 August. At the half-year, Rolls added £100m to in-service cost estimates across the next three years, and expects the 2019 full-year impact to sit around £450m-£500m.
It recorded a free cash outflow of £391m for its core business, which was largely attributed to the seasonal timing of engine deliveries. Rolls reiterated its full-year free cash flow (FCF) targets of around £700m and £1bn respectively for 2019 and 2020 - in 2019, this will be supported by favourable working capital movements.
Moody’s is unconvinced. While the agency upgraded its outlook on Rolls from ‘negative’ to ‘stable, citing improving performance, anticipated growth in aftermarket earnings and the long-term stability of the group’s engine programmes, Moody’s does not consider its forecast £600m to £800m of Rolls’ 2019 working capital gains, most which would be achieved through inventory reductions and defence contract advance payments, to be sustainable. The agency also predicts that Rolls will likely “have to rely on further inventory reductions” if it is to meet its 2020 cash flow target. The high costs and execution risks associated with resolving the Trent 1000 were also factors in Moodys’ decision to downgrade.
An investigation is also under way after 25 cars and 12 houses were reportedly damaged after metal fragments fell from a Norwegian Air Boeing 787 Dreamliner’s Trent 1000 over the Roman suburb of Fiumicino just after take-off. A spokesperson for the airline said that the flight “experienced a technical issue a few minutes after take-off”. Norwegian Air is cooperating with Aeroporti di Roma and Italian authorities.
A Rolls spokesperson said: “We are aware of the event and are working with our customer to provide support and technical assistance.” The spokesperson said that the company was unable to speculate on the cause of the incident owing to the open investigation, for which Rolls pledged its support.
