S&P Global upgrades credit rating for Rolls-Royce

Credit ratings agency S&P Global has upgraded its view on aerospace engineer Rolls-Royce by one notch on the back of the group's rising profitability, strong cash generation and deleveraging.

The brighter outlook follows the company's half-year report on 1 August, which showed that operating profit margins rose to 14% from 9.7% a year earlier, driven by margin improvements in the civil aerospace division due to an increasing contribution from aftermarket services.

"While the material growth in margins in civil aerospace is expected to flatten over the next few years, we think other business lines could support further margin increases," S&P Global said in a research note.

The agency has now lifted its profit forecasts for Rolls-Royce over 2024 and 2025, along with its free cash flow projections.

"Improvements in free cash flow are supported by an increase in engine flying hours, resulting in growing long-term service agreement (LTSA) balances and higher shop visits in civil aerospace, along with continued pricing initiatives and actions completed under the Transformation Program," S&P Global said.

Meanwhile, with the balance sheet expected to continue improving, the agency expects Rolls-Royce's adjusted debt-to-EBITDA ratio will stay "well below" 1.5x for the next two years.

"We therefore raised our issuer credit ratings on Rolls-Royce to 'BBB/A-2' from 'BBB-/A-3', as well as the issue rating on Rolls-Royce's senior unsecured debt to 'BBB' from 'BBB-'.

"The positive outlook reflects that we could raise the rating over the next 18–24 months if the company maintains strong performance and implements predictable financial policies that support a higher credit standing even in weaker market conditions."

Rolls-Royce shares were up 0.9% at 496.7p by 1039 BST.