TEXT-Fitch:No rating impact on Rolls-Royce or MTU Aero Engines

Rolls-Royce, for which the IAE represents approximately 13% of its civil aerospace revenue, will see a material improvement in its liquidity position as a result of the transaction, with the USD1.5bn cash payment received at closing (expected H112), likely to stay on the company’s balance sheet. This cash inflow will go some way to offsetting the material cash outflow of over GBP1.3bn in H211 in relation to the Tognum AG acquisition. As part of the consideration for its stake, Rolls-Royce will also receive cash payments from IAE over a 15-year period based on the number of flight service hours of the JV’s key product, the V2500 aero engine. RR will include this payment in its operating profit, thus boosting the earnings margins and providing increased headroom under the current ratings.By exiting the IAE, the transaction will also allow Rolls-Royce to focus on the development of an all-new mid-sized aero engine for the next generation single aisle aircraft expected in the middle of the next decade, which is seen by the company as of importance, in light of its decision not to develop a new engine for the recently launched re-engined single aisle aircraft by Airbus (A320NEO) and Boeing (B737MAX).For MTU, which plans to materially increase its stake in the V2500 programme from the current 11%, the cash outflow in relation to the transaction may lead to a temporary loss of financial flexibility, although the group’s liquidity is likely to remain moderate in light of its ample cash reserves, available credit lines and free cash flow generation. Nevertheless, Fitch will monitor closely refinancing risk in the near future, particularly in relation to the March 2012 EUR150m convertible bond.Furthermore, the transaction will represent an increase in the revenue and earnings sourced from the company’s largest and most successful commercial engine programme. MTU plans to increase its stake in IAE by acquiring a part of the Rolls-Royce stake bought by P&W, once the later completes the buyout of the 32.5% Rolls-Royce share.