OREANDA-NEWS. Fitch Ratings has affirmed Sweden-based Atlas Copco AB's (Atlas Copco) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'A' and its Short-term IDR at 'F1'. The Outlook on the Long-term IDR is Stable.

The ratings reflect Atlas Copco's strong and well-diversified business profile with market and technological leadership and global presence in many industrial segments, which offsets its exposure to the cyclical end-markets of some of its customers. The strength of the business is mirrored by the company's solid and stable financial profile, which displays many aspects of a strong 'A' category diversified manufacturing company.

KEY RATING DRIVERS
Strong Business Profile
The group demonstrated through the last recession the smoothing benefit of its diversification, indicating that ratios are likely to remain fairly stable through the medium term despite volatility in some of its customer markets.

Stable Cash Generation
The company's funds from operations (FFO) margin, at 17% for the last 12 months (LTM) to September 2015, is strong for the 'A' category. Cash from operations is more volatile owing to sometimes large working-capital swings, chiefly in relation to inventory. Depending on working-capital cash flows, the company's FCF margin, at 12% for LTM to September 2015 but likely to be 7% for 2015, is sometimes lower than what is commensurate with a 'A' diversified manufacturing company. This is largely due to the group's high shareholder payout policy, which is at around 50% of net profit.

Strong Capital Structure and Liquidity
The company's capital structure has been, and is expected to remain solid, with gross and net leverage of under 2x and 1.5x, respectively, a backdated debt maturity profile and sound liquidity. Atlas Copco does not keep a large cash pile given its consistently strong FCF generation, ample available credit lines and the absence of significant seasonality in working-capital flows.

M&A Unlikely to Threaten Ratings
Fitch does not expect Atlas Copco's acquisition strategy to have a negative rating impact in the short- to medium-term as the group is likely to continue to either make small bolt-on acquisitions or structure transactions in such a way so as not to have a material negative impact on its capital structure.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Atlas Copco include:

-Mild top line growth driven by bolt-on M&A and organic growth
-No material margin erosion from current levels given company's ability to stabilise margins through cost control
-Capex at 3% of revenue
-Dividend payments to remain around 50% of after-tax profits
-Working-capital flows to broadly mirror revenue changes with some minor net working capital improvements
- M&A at SEK2bn p.a. after 2016 - broadly in line with historical levels.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating actions include:
- FCF margin consistently above 6% (2014: 7.4%; 2015E: 6.7%)
- FFO fixed charge cover above 8x on a sustained basis (2014: 8.7x; 2015E: 9.3x)
- Fitch adjusted net cash position on a sustained basis

Negative: Future developments that could lead to negative rating action include:

- Large debt-funded acquisitions materially weakening financial flexibility
- Earnings and cash generation becoming materially more volatile than has been the case historically
- FFO adjusted net leverage above 2x on a sustained basis (2014: 1.7x; 2015E 1.7x)
- FFO margin consistently below 8% (2014: 15.3%; 2015E: 16.5%)
- FCF margin consistently below 4%

LIQUIDITY
At end-Q315, Fitch-adjusted cash was SEK4.3bn, down from SEK5.4bn at end-2014, owing primarily to the now-completed share buyback, while committed available long term bank lines totalled SEK13.7bn. The group consistently generates positive FCF, which we expect to continue, and has proven access to debt capital markets. Debt maturing in the next 24 months, are two loans totalling SEK1bn and a 2017 USD800m bond.