OREANDA-NEWS. Fitch Ratings has affirmed GKN Holdings plc's (GKN) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-' and Short-term IDR at 'F3'. The Outlook is Positive.

The Positive Outlook reflects Fitch's view that GKN's financial results could show continuous gradual improvement in the short-term, resulting in a financial profile firmly within the 'BBB' rating.

KEY RATING DRIVERS
Continued Results Improvement Likely
GKN's financial results, which over the past two years have been broadly within our expectations, could improve in the short- to medium-term, leading to a financial profile commensurate with a 'BBB' rating. An upgrade is possible in 2016 once Fitch has assessed GKN's expected margin evolution, investment plans beyond 2016, cash deployment and acquisition strategy. In particular, Fitch will focus on GKN's ability to generate sustainable funds from operations (FFO) margin of 9% and free cash flow (FCF)-to-revenue above 2%.

Improving Margins
GKN achieved a stable FFO margin of around 10% in 2014, compared with 10.6% in 2013 and 8.5% in 2012, due to tight cost management, the benefits of previous restructuring and an improved product mix. The EBITDAR margin was also stable at 13%, compared with 12.9% in 2013 and 12.5% in 2012. Fitch expects the margin to remain around 13% on a consistent basis.

Robust Capital Structure
The capital structure remains strong and is more in line with that of a 'BBB' rating. At end-2014 gross leverage was well below 2x, which Fitch expects to remain so in the next two to three years. GKN also has sound liquidity, with high cash balances, ample committed credit lines and positive FCF. Net working capital has been fairly stable in recent years, at 9% of sales. This level is unlikely to change materially in the short- to medium-term due to GKN's continuous drive to improve working-capital management.

Moderate FCF
GKN's FCF margin, which we expect to be 1% in 2015, is moderate for the current rating. It may remain under 2% in the short- to medium-term, due to expansionary capital expenditure and rising dividend payments, which in itself will not be an impediment to an upgrade if the present FFO margin and leverage are broadly stable.

Leading Market Positions
GKN is the world's leading manufacturer by sales of driveline systems and sintered metals for precision components. It also has strong positions in aerospace equipment manufacturing, which will be strengthened by the recent Fokker Technologies acquisition. Fitch views positively GKN's continuing diversification into aerospace as it is a more stable and higher- margin segment relative to auto supply.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for GKN include:
-Low to mid-single-digit organic revenue growth;
-EBITDAR margin approaching 13% as the company benefits from prior restructuring and overall market growth;
-Positive FCF;
-Capex of 5%-6% of revenue;
-10% growth a year in dividend payout;
-No significant M&A activity in the short- to medium-term.

RATING SENSITIVITIES
Positive rating action may occur if GKN achieves a minimum FCF of 2% of revenues (2014: 1.9%; 2015E: 0.9%), FFO-based lease-adjusted gross leverage comfortably below 2x (2014: 1.6x; 2015E: 1.7x), cash flow from operations-to-sales of 8.5% (2014: 9.4%; 2015E: 8.2%), FFO margin around 9% (2014: 9.9%; 2015E: 9.6%) and EBITDAR margin of 13% (2014: 13%; 2015E: 12.8%), all on a sustained basis.

Downward rating pressure may result if FFO-based lease-adjusted gross leverage increases above 2.5x, FCF is negative and large debt-funded acquisitions and/or aggressive shareholder returns weaken the company's financial flexibility.

LIQUIDITY
In addition to its reported GBP273m of cash and short-term deposits at end-H115, GKN has committed long-term banking facilities of GBP800m maturing in 2019 (GBP56m drawn at end-H115). Expected positive FCF generation will allow the company to improve leverage levels, which are already strong for the rating. GKN has little debt maturities in the next three years, and maintains good access to the capital markets.