OREANDA-NEWS. February 16, 2015. Fitch Ratings has already factored into the Rolls-Royce Holdings plc's (Rolls; A/Stable) ratings the possibility of headwinds in some of the company's markets. We believe that the rating has sufficient, albeit diminished, headroom to withstand these challenges and therefore, do not expect any immediate rating impact from the company's revised revenue and earnings guidance for 2015.

Rolls' 2014 results were within Fitch's expectations, with the company achieving an FFO margin of 12.6%, down from 13.8% in 2013 due to weaker profitability at the Power Systems and Marine divisions but higher than the 11% expected by Fitch, while the FCF margin was -2.7%, from +2.7% in 2013, chiefly owing to a large working capital outflow. Year-end 2014 gross adjusted leverage was 1.8x, broadly in line with the 1.7x achieved at end-2013 and the 2x expected by Fitch as the group reduced its gross debt levels slightly.

However, management's new guidance for 2015 is for revenue to be broadly flat (previously small single digit growth), and a decline in pre-tax profit of between 5% and 15% (previously broadly flat).

Despite the weaker outlook for some of the company's non-aerospace end markets such as oil and gas and marine, Fitch expects Rolls' overall credit profile to be only slightly affected and the company to maintain a financial profile that is broadly consistent with the rating. Whilst earnings and cash flows in 2015 are likely to be somewhat lower in 2014 as a result of the challenges the company currently faces, over the medium term, Fitch expects a recovery of key metrics to the levels exhibited in recent years as a result of restructuring measures as well as a likely gradual rebound in the results in the defence aerospace and marine divisions.

The company's resilient and diversified business profile underpins Fitch's assumption that the financial profile will remain broadly stable. Rolls has demonstrated the ability to manage a broad portfolio of turbine-related assets and generate cash for several years despite industry challenges and wider economic pressures. The company is well placed to withstand potential declines in demand resulting from deteriorating market conditions, due to its business diversification, growing proportion of long-term service contracts, and cost-cutting measures.

Fitch also notes Rolls' strong liquidity, which also support the ratings. In addition to its GBP2.9bn of cash and short-term deposits at end-2014, Rolls has committed long-term banking facilities totaling GBP1.3bn. The group's cash reserves are likely to decline in 2015 as a result of the weaker operating performance as well as the GBP1bn share buyback programme which is expected to be completed by end-2015, but financial flexibility and leverage are not expected to deteriorate materially. Rolls-Royce has a back-ended debt maturity profile and maintains good access to the capital markets.

Rolls' ratings could be downgraded if the lease-adjusted debt/FFO ratio deteriorates above 2x (1.8x at end-2014, expected to be around 2x at end-2015), the FFO/revenue ratio declines below 11% (12.6% for 2014, expected at slightly over 11% in 2015), the FCF margin is under 3% (-2.7% in 2014, expected to be around 1% in 2015) and the fixed charge cover falls under 7x (8.5x for 2014, expected to remain at over 8x for 2015). All ratios are on a sustainable, consistent basis.

An upgrade is unlikely in the absence of a material change to the group's business profile, given that the company has reached a rating close to the highest Fitch deems achievable for the aerospace and defence industry.