OREANDA-NEWS. Fitch Ratings has affirmed Siemens AG's Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'A', subordinated rating at 'BBB+' and Short-term IDR at 'F1'. The Outlook is Stable. The senior unsecured, subordinated and Short-term ratings relate to debt issued by the group's financing vehicle Siemens Financieringsmaatschappij N.V., which is guaranteed by the parent entity.

The affirmation reflects the company's stable credit profile, which is commensurate with an 'A' rating. Siemens's moderately strong financial profile for the rating is characterised by a stable funds from operation (FFO) margin, relatively weak free cash flow (FCF) generation and leverage at its industrial operations being broadly in line with an 'A'-rated diversified manufacturing company.

The diversity of its industrial operations is highly supportive of the company's credit profile, as it helps protect Siemens from weaknesses and cyclical swings in specific products, sectors or geographical regions. The company has a highly diversified range of products and services and is active in more than 190 countries, although geographically it remains heavily reliant on European markets, which account for approximately half of the company's revenue.

KEY RATING DRIVERS
Weak Cash Generation
The underlying earnings (EBIT & FFO) of Siemens have historically been average for its rating and often below that of its peers. The company regularly incurs extraordinary charges related to restructuring and project cost overruns and its margins are further affected by strong competition or market weaknesses. Because of its moderate capital intensity (relative to the sector) and a fairly high dividend payout, FCF is weak for the rating, typically at between 2% and 3%. This is a significant rating constraint.

Moderate Capital Structure
Siemens' capital structure, adjusted for its financial services (FS) activities, is deemed moderate for the rating with leverage metrics broadly within the 'A' rating expectations. At end-2015, industrial operations' FFO gross and net leverage were at 2.5x and 1.4x, respectively, which were somewhat higher than in previous years but still within the downgrade sensitivities of 2.5x and 1.5x, respectively. The higher leverage was a result of additional debt incurred during 2015 to fund the acquisitions of Dresser-Rand and Rolls-Royce Energy.

To calculate the leverage of Siemens' industrial operations, Fitch deducts from reported consolidated debt the Fitch-adjusted amount of debt at the group's financial services division. In Fitch's adjustment the debt at financial services is capped at 8x the equity allocated by Siemens to that particular division.

Cash Deployment
Fitch expects Siemens to continue to seek and shed assets as part of its long-term growth strategy. In 2015, the company spent a net EUR4.3bn on M&A. Fitch assumes Siemens will in the short term make bolt-on purchases and dispose of small units with a broadly neutral net cash effect as it focuses on integrating recent acquisitions and on improving the performance of existing assets to targeted levels.

Fitch also expects the company's new buy-back programme of up to EUR3bn over up to three years to be spread out evenly over that period. At these levels, cash returns to shareholders are unlikely to have a material rating impact as they should be adequately covered by FCF. However, should the shareholder returns exceed projected levels, or FCF, the resulting deterioration in the financial profile may lead to a negative rating action.

Strong Business Profile
Siemens benefits from strong product and geographical diversification as the world's second-largest capital goods manufacturer. It holds dominant market positions in many sectors, serves a global customer base and has a significant emerging-markets presence, from which it generates about one-third of its revenue. This makes the group fairly resilient to adverse changes in individual markets or regions.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Low single-digit organic revenue growth
- Gradually improving earnings margins as a consequence of prior restructuring measures
- Stable working capital levels
- EUR3bn share buyback to be evenly spread out over 2016 - 2018
- Capex at 2.5% of revenue
- Net M&A to be zero over the next two to three years
- Some debt repayment depending on FCF generation (available cash levels maintained at between EUR9bn and EUR10bn)
- Financial services ratios to remain fairly stable

RATING SENSITIVITIES
Fitch has adjusted rating sensitivities for Siemens to align with industry peer average credit metrics. These include:

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- Strong double-digit industrial FFO margin.
- Below 1.5x industrial FFO gross leverage.
- Below 0.5x industrial FFO net leverage.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- Industrial FFO margin below 8%.
- Above 2.5x industrial FFO gross leverage.
- Above 1.5x industrial FFO net leverage.

LIQUIDITY
Siemens' liquidity at end-2015 comprised EUR9bn cash (adjusted for around EUR1bn in non-available cash which Fitch deducts for intra-year working capital swings), compared with EUR3bn of short-term debt maturing in the 12 months to September 2016. The group further benefits from three undrawn revolving credit facilities totalling around EUR7bn and strong access to capital markets.