OREANDA-NEWS. Fitch Ratings says that there is no immediate impact on GKN Holding's (GKN) Long-term Issuer Default Rating (IDR; BBB-/Positive) from the announced GBP449m acquisition of aerospace supplier Fokker Technologies Group B.V. (Fokker).

GKN's ratings are not immediately affected due to three factors. Firstly, the company continues to display relatively strong financial metrics for the 'BBB-' rating, as evidenced by its 1H15 results announced today. Secondly, the structure of the Fokker transaction, which will be part funded via raising GBP200m equity, ensures that the group's leverage will not deteriorate materially on a pro-forma basis. The transaction is expected to close in 4Q15. Thirdly, GKN's business profile will improve moderately as a consequence of the acquisition of Fokker.

Fitch views the higher share of revenue from aerospace activities (rising to over 35% from around 30% currently) as a credit positive given the higher and more stable margins derived from this segment compared with the group's biggest Driveline business. GKN will also benefit from strengthening in key sub-segments like aerostructures, where it will become the global number two, or diversifying into new positions like electrical wiring, where Fokker is the global number three player.

Fitch does not expect any material impact on GKN's financial profile from the acquisition. Given that over 40% of the cash consideration will be funded via an equity issue, the group's gross leverage will likely only deteriorate by around 0.2x-0.3x on a pro-forma basis. Gross leverage at 1H15 (based on last 12 months (LTM) funds from operations (FFO)) was 1.7x (1.6x at end-2014), already within the upgrade guideline of under 2x. Fitch anticipates that leverage will remain under 2x in the short to medium term.

The company's earnings margins are also likely to remain stable in the short to medium term. This is despite Fokker displaying margins which are below those achieved by GKN. Fitch believes that the relatively small size of Fokker within GKN, as well as the possibility of cost synergies being extracted in the medium term, will see key margins like EBITDAR (12.9% for LTM 1H15, 13% in 2014), cash flow from operations (9.4% for LTM 1H15, 9.4% in 2014) remain close to or above Fitch's upgrade guidelines of 13% and 8.5%, respectively.

Following the Fokker transaction, Fitch believes that GKN will retain a financial profile approaching that expected of a 'BBB' rated industrial company. An upgrade is possible in the next 12 months, the key to which is free cash flow (FCF). At present, Fitch expects the FCF margin (1.3% for LTM 1H15 and 1.9% in 2014), to remain under the upgrade guideline of 2% in 2015. Over the medium to long term, an important consideration for an upgrade would be the company's capacity to consistently generate FCF above 2% of revenue.