Fitch downgrades Rolls Royce outlook to negative after profit warning

Fitch Ratings downgraded its outlook on aerospace and engineering firm Rolls-Royce to ‘negative’ from ‘stable’ following the company’s fourth profit warning in just over a year on Thursday.

The credit ratings agency said the move reflected its view that RR’s key financial metrics, such as free cash flow and gross leverage, may no longer be commensurate with the current ratings from 2016.

“While earnings and cash flows in 2015 will be somewhat lower than in 2014, 2016 will see a material deterioration in these measures as a consequence of slower markets for maintenance and spare parts relating to the existing fleet of large aero engines, weak demand for corporate and business jet engines as well as further deterioration in the marine division.

“Restructuring measures are likely to aid the recovery of key metrics over the medium term, but the ratings will face pressure if the company's FCF generation does not return to historical levels from around 2018, in line with our expectations of the company exiting the costly ramp up and programme transition phase of the product life cycle.”

At 1522 GMT, RR shares were down 3.8% at 516.50p, having ended 20% weaker on Thursday after it said earnings for the year will be at the low end of guidance, downgraded its expectations for next year and warned of a possible cut to the dividend.

The company reaffirmed its 2015 guidance but said profit for the year is expected to be at the lower of its £1.33bn to £1.48bn range.

In addition, analysts at Fitch said profit headwinds next year could be around £650m compared to 2015. It said many of the headwinds impact higher than average margin segments of the business, or businesses where fixed costs are relatively high. As a result, the profit fall through is significant.