Research Update: Rolls-Royce Outlook Revised To Negative On Higher Engine Costs; 'BBB+/A-2' Ratings Affirmed

U.K.-based global aerospace and defense company Rolls-Royce PLC will need to spend around £1.5 billion addressing underperformance of certain Trent 1000 and 900 engines currently in service, which is more than we expected and double the amount the company disclosed in March 2018. While the higher costs are still manageable, we see a risk that if further increases materialize, or if similar issues emerge in other engines, the additional costs could limit or delay the material upturn in EBITDA and free operating cash flow (FOCF) that we forecast for 2019 and 2020, and on which the current ratings depend. We are therefore revising our outlook on Rolls-Royce to negative from stable, and affirming our 'BBB+/A-2' issuer credit ratings. The negative

...+ U.K.-based global aerospace and defense company Rolls-Royce PLC will need to spend around ú1.5 billion addressing underperformance of certain Trent 1000 and 900 engines currently in service, which is more than we expected and double the amount the company disclosed in March 2018. + While the higher costs are still manageable, we see a risk that if further increases materialize, or if similar issues emerge in other engines, the additional costs could limit or delay the material upturn in EBITDA and free operating cash flow (FOCF) that we forecast for 2019 and 2020, and on which the current ratings depend. + We are therefore revising our outlook on Rolls-Royce to negative from stable, and affirming our '###+/A-2' issuer credit ratings. + The negative outlook reflects that we may lower the ratings if engine performance issues spread, or if additional material costs limit expected improvements in EBITDA and FOCF in 2019 and 2020. From 2019, we regard funds from operations to adjusted debt...

Research Update