OREANDA-NEWS. Fitch Ratings says in a new report that it expects Finmeccanica SpA (BB+/Stable) to sell its 25% stake in the defence contractor joint venture (JV) MBDA in equal measure to its other partners, Airbus Group SE (A-/Stable) and BAE Systems plc (BBB+/Negative). Such a transaction is unlikely to have any rating impact on any of the three entities.

This is our central case in a scenario analysis that we have run to assess the potential effect of Finmeccanica exiting the JV on the ratings of the three present partners in MBDA. As well as the most likely scenario of BAE and Airbus increasing their respective stakes in MBDA to 50%, Fitch looks at the possible effect of two other scenarios. The first involves Airbus taking sole control over MBDA by buying out both Finmeccanica and BAE; while the second has BAE buying out the other two partners.

Our analysis shows that regardless of what the new shareholding structure of MBDA will be, or how any changes are funded, Airbus' ratings will not be affected. Given the small size of MBDA (revenue under EUR3bn) in relation to the Airbus Group (revenue of over EUR63bn expected in 2015), there would be an insignificant change to the company's financial profile even if it increases its stake to 100%.

For BAE, however, whose ratings are already under pressure from the group's fairly weak cash flows and high leverage, increasing its stake in MBDA may have a negative rating impact, as the company's leverage could rise to levels no longer commensurate with the current rating. Depending on how much of MBDA BAE buys and how it funds the acquisition, its gross leverage could be up to 0.5x higher than otherwise, which could lead to a downgrade.

For Finmeccanica, the rating impact from the sale is likely to be immaterial. While the cash proceeds from the sale of MBDA would improve the liquidity and financial flexibility of the company, the impact on its cash generation or gross leverage is unlikely to be material enough to return the company to investment-grade rating.

In itself, a change in the shareholding structure of MBDA is unlikely to affect the defence industry in Europe, although we expect a mild pick-up in M&A in the short term.

For further details see "Implications for Finmeccanica, BAE and Airbus of a Change in MBDA Ownership" on www.fitchratings.com or by clicking the link above.