OREANDA-NEWS. Fitch Ratings has revised the Outlook on Royal Philips' (Philips) Long-term Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR and senior unsecured ratings at 'A-'.

The Outlook revision follows Philips' announcement that the sale of 80% stake of its Lumileds business to Chinese GO Scale capital has been terminated due to concerns raised by the Committee on Foreign Investment in the United States. While we believe that management's business plan for its lighting business is still on track, there are uncertainty and execution risks regarding the implementation of the strategy. Philips aims to reshuffle its lighting business. This includes the disposal of Lumileds and the IPO or sale of its lighting solutions division in 2016.

Any delay beyond 18 months, leading to continued stress on net leverage metrics could lead to a downgrade. Without the proceeds from the Lumileds sale, or the potential IPO or sale of the lighting solutions business, funds from operations (FFO) adjusted net leverage will remain well above 1.5x over the medium term, which we consider weak for Philips' ratings.

KEY RATING DRIVERS
High Leverage
Fitch forecasts that FFO adjusted net leverage, which is expected to be at 2.5x at end 2015 will likely be above 2x over the short to medium term without the proceeds from a successful Lumileds sale. Although the strategic disposal of the business unit is still possible, and the management intention is intact, the pricing and timing is highly dependent on market conditions. The group's capacity to repay debt is also restricted by the present share buyback programme, which Fitch expects to lead a cash outlay of around EUR400m in 2016.

Lighting Split On Track
Fitch believes that the separation of Philips' lighting business and a minority share IPO or sale is still possible in the short to medium term. Fitch believes a successful IPO/Sale could provide extra capital for deleveraging and inorganic growth for Philips' core business lines. However, we also consider that today's announcement flags execution risks regarding strategic separation of the lighting solutions business as well.

Improved Margins
Fitch forecasts that EBIT margins will increase to above 5% at end-2015 from 2% a year ago, driven by an improvement in consumer lifestyle and better than expected cost savings from Philips' restructuring programme. Fitch expects healthcare and consumer markets to be less affected by the current macroeconomic conditions, but there are limited prospects for a sharp pickup in volume growth and improved pricing in the next 12-18 months. Fitch continues to forecast low single digit revenue growth in 2016 backed by like for like order growth of mid-single digit growth in 2015.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Muted organic growth environment in North American and Asian markets.
- Group profitability margins to rise but remain subdued by restructuring & separation costs.
- Marginal working capital cash flows
- Capital expenditure broadly in line with historical levels.
-No significant M&A in the forecast period.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO margin below 8% (2014: 3.5%; 2015E: 5.1%)
- FFO adjusted net leverage above 1.5x (2014: 4.6x; 2015E: 3.1x)
- FCF margin below 4% (2014: 2.1%; 2015E: 0.6%)
- Fixed charge cover below 6x (2014: 3.3x; 2015E: 4.5x)

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- FFO margin above 10%
- FFO adjusted net leverage below 1x
- FCF margin above 5%
- Fixed charge coverage above 8x