Fitch upgrades Leonardo to 'BBB' on improved margins and cash flow

Fitch Ratings upgraded Leonardo S.p.A. to 'BBB' from 'BBB-' with a Stable Outlook, citing expectations of improved EBITDA margins and free cash flow generation through 2028. This upgrade reflects the company's strong financial outlook, driven by efficiency initiatives, reduced aerostructures losses, and a robust order backlog that reached €45 billion. While Leonardo's planned €1.7 billion cash-funded acquisition of Iveco Defence is expected to have only a moderate impact on its financial profile, the potential divestment of Iveco Defence's trucks business could further support forecasts of improved EBITDA leverage and sustained free cash flow.

Analysis

Fitch Ratings' upgrade of Leonardo S.p.A. to 'BBB' with a Stable Outlook underscores a significant improvement in the company's credit profile, underpinned by strong forward-looking fundamentals. The rationale is based on projections of enhanced EBITDA margins, expected to expand from approximately 10% in 2023-2024 to 12% by 2027-2028, and sustained free cash flow margins of 3-4% through 2028. This financial strengthening is driven by operational efficiencies, improved performance in defence electronics, and a reduction in losses from the aerostructures division. The planned €1.7 billion cash-funded acquisition of Iveco Defence is viewed as manageable; while it is projected to raise net EBITDA leverage to 1.1x by year-end 2026, this level remains comfortably below the 1.3x recorded at the end of 2024. Furthermore, a potential divestment of Iveco's truck business to Rheinmetall could mitigate the cash impact. The company's robust commercial position is evidenced by a growing order backlog of €45 billion, equivalent to 2.4 years of production, and a well-diversified revenue stream across geographies and segments like defence electronics (43%) and helicopters (31%).

Key Decisions for Investors

• The credit rating upgrade to 'BBB' signals a strengthening financial profile, which could warrant a positive reassessment of the company's equity and debt instruments relative to peers.
• Investors should closely monitor the execution of the Iveco Defence acquisition, particularly any developments regarding the potential divestment of its trucks business, as this will directly influence the 2026 cash outflow and leverage profile.
• The positive outlook is contingent on management delivering the forecasted margin expansion and FCF generation; therefore, tracking quarterly performance in the defence electronics and aerostructures segments is critical to validating the investment thesis.