Moody's Investors Service has affirmed the Baa3 senior unsecured ratings and (P)Baa3 senior unsecured MTN Programme ratings of GKN Holdings, the finance, investment and holding company of GKN Group (GKN). The outlook on the ratings remains stable.

"The affirmation reflects the company's strategy update, including planned measures to improve the recently weak operating performance and the planned disposals of several non-core assets", said Matthias Heck, Moody's lead Aanalyst for GKN.

"The final amount of the company's plan to distribute up to GBP2.5bn to shareholders over the next three years is subject to maintaining the investment grade rating which gives us comfort that the current capital structure will not deteriorate within the next three years and credit metrics remain in line with our expectations for the Baa3," added Heck.

GKN this week announced a strategy update to investors which includes a quantification of its newly established efficiency programme, Project Boost, of GBP340m from the end of 2020, the intention to sell several non-core activities, including the Powder Metallurgy division, within the next 12-18 months, and the distribution of up to GBP2.5bn cash returns to shareholders over the next three years, subject to maintaining an investment grade rating.

The rating affirmation reflects the expectation that, including the impact of Project Boost, GKN's credit metrics will be in line with Moody's expectation for the Baa3 rating. Proceeds from the contemplated asset disposals will initially strengthen the group's credit profile.

Based on the company's commitment to maintaining its investment grade rating, Moody's expects that shareholder distributions will only be made at a point in time and at an amount that will leave credit metrics in line with Moody's expectations, such as debt/EBITDA (Moody's adjusted) of maximum 3.0x.

GKN's metrics may weaken slightly over the course of the coming year due to up front costs associated with Project Boost but should then strengthen as the plan takes effect. The rating may come under pressure if the plan proves less successful than anticipated, or if management choose to make distributions to shareholders at a faster pace or larger amount than improvement in metrics allows.

The stable outlook reflects Moody's expectation that GKN will be able to sustain credit metrics and financial policy in line with the investment grade rating, supported by improvements in operating performance, including the impact of targeted efficiency measures. The stable outlook also reflects that the company would not distribute proceeds from asset disposals at an amount that would weaken credit metrics beyond our expectations for a Baa3 rating.

Given the overall weak positioning of the rating, an upgrade is currently unlikely. However, Moody's would consider an upgrade to Baa2 upon clear visibility that GKN will be able to further improve its credit strength as indicated by EBITA margins consistently exceeding 9.0%, leverage reducing further to a level of below 2.5x debt/EBITDA through the cycle
(3.0x at LTM to June 2017) and retained cash flow coverage of around 30% RCF/net debt, all on a sustainable basis.

Downward rating pressure would arise upon a sustainable deterioration of earnings and cash flow and shareholder distributions contrary to current expectations. Such a development would be exemplified by negative free cash flow, EBITA margin falling below 7.0%, a failure to maintain leverage at levels of debt/EBITDA below 3.0x or retained cash flow coverage falling to a level of around 20%. Likewise, larger than expected shareholder distributions, could trigger a negative rating action.

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