Investing.com -- Moody’s Ratings has today confirmed the Baa3 long-term issuer rating of Leonardo S.p.A., an Italian multinational company specializing in aerospace, defense, and security. Along with this, the ratings agency has also affirmed the company’s Baa3 senior unsecured rating, its (P)Baa3 senior unsecured MTN program rating, and its P-3 Commercial Paper rating. The Baseline Credit Assessment (BCA) stands at baa3. In a significant move, Moody’s has revised the outlook for Leonardo from stable to positive.
The decision to affirm these ratings and revise the outlook is based on Leonardo’s strong operational performance since its upgrade to Baa3 in May 2023. The company has shown promising growth, buoyed by increased defense spending across European NATO states. Leonardo’s revenue in 2024 showed a 21% increase compared to 2022, and its Moody’s adjusted EBITDA rose by 28%. Over the past two years, the company’s combined Moody’s adjusted free cash flow was close to €1 billion, a substantial increase from previous years.
The company’s adjusted gross leverage stood at 2.7x at the end of 2024, down from 3.5x in 2023. This figure is already below Moody’s quantitative upgrade trigger, not yet accounting for the €500 million bond repayment in March 2025, which would further reduce the ratio to 2.4x.
Leonardo’s earnings are expected to continue growing in the coming years, driven by European initiatives to increase defense spending and invest in its own defense capabilities. The company’s credit profile is also expected to withstand any M&A risks, primarily within its Cyber and Space divisions. Leonardo has shown that growth in traditional defense segments is mainly achieved through joint ventures, such as those with Rheinmetall (ETR: RHMG ) AG for tanks and military vehicles production or with Baykar for drones.
Despite losses in its Aerostructures division and TelCo business within Thales (EPA: TCFP ) Alenia Space JV, Leonardo’s credit profile remains strong. The company is actively working on solutions for both issues. Tariffs and trade tensions pose a risk, but this is expected to be more contained for defense-exposed companies like Leonardo, which has strong local production in the United States.
The rating is also influenced by the Italian sovereign rating, which is currently on par with Leonardo’s senior unsecured rating. However, a significant share of revenues and assets outside its domestic market, along with limited reliance on domestic funding sources, could justify a rating one notch higher than the Italian sovereign, assuming Leonardo’s stand-alone credit quality continues to strengthen beyond the requirements of its current rating category. Leonardo is rated under Moody’s Government-Related Issuers methodology due to the 30.2% ownership by the Italian Ministry of Economy and Finance.
The positive outlook reflects Moody’s expectation that Leonardo will continue to demonstrate strong operating results, supported by increased defense spending across European NATO states. The ratings agency also anticipates that Leonardo will maintain prudent financial management and preserve its balance sheet strength while focusing on strengthening its core business and expanding its Cyber and Space divisions.
Factors that could lead to a rating upgrade include a gross debt/EBITDA ratio sustained below 3.0x, operating profit margin trending towards high-single-digit percentage points, sustainably positive free cash flow generation, conservative financial policies and strong liquidity, and the Italian sovereign remaining rated at least Baa3. Conversely, factors that could lead to a rating downgrade include a gross debt/EBITDA ratio sustained above 4.0x, operating profit margin sustained below mid-single-digit percentage points, negative free cash flow generation and deterioration in the liquidity profile, and a rating downgrade of the Italian sovereign below Ba1.
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