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Industrial and financial transactions

Industrial transactions. In 2016 the following industrial transactions were carried out:

  • Completion of the disposal of 100% of Fata SpA. On 10 March 2016 there was the closing of the disposal to the DANIELI Group of 100% of the share capital of Fata S.p.A., which is active in the design of industrial systems, and of its subsidiaries. The equity investment held in Fata Logistic Systems and some credit items, which were contributed to Leonardo Group companies, were spun off from Fata, through a partial demerger that took place before the closing;
  • Completion of the merger by incorporation of Sirio Panel SpA. On 23 June 2016 the Board of Directors of Leonardo approved the plan for the merger of Sirio Panel S.p.A. (a directly and wholly-owned subsidiary) by incorporation into Leonardo. The company is already within the business area of the Airborne & Space Systems Division, its objective being further to enhance the Division’s expertise and know-how;
  • Incorporation of the new legal entity of UK Leonardo MW Limited. On 28 July 2016 the Board of Directors of Leonardo S.p.a. approved the plan to concentrate the British business of the Group into one legal entity. The new “One Company” governance model will also be extended to the United Kingdom, with the objective of improving Leonardo’s positioning in the second domestic market and at an international level. Leonardo MW Ltd (the new corporate name of SELEX ES Ltd) will combine AgustaWestland Ltd, Selex ES Ltd, DRS Technologies UK Ltd and Finmeccanica UK Ltd;
  • Strategic cooperation agreement between Leonardo and Polska Grupa Zbrojeniowa SA (PGZ). On 6 September 2016 Leonardo and Polska Grupa Zbrojeniowa S.A. (PGZ) signed a letter of intent in order to establish a long-term strategic cooperation relationship by sharing their know-how, technologies and industrial capabilities, aimed at strengthening their respective competitive positions in the international market;
  • Expansion in the Space sector through an investment in Avio SpA. On 20 October 2016 the Board of Directors of Leonardo resolved to increase the stake held in Avio S.p.A. from the present about 14% to about 28%. The total outlay expected for Leonardo amounts to about €mil. 43. The Business Combination and the subsequent listing of Avio are expected to be carried out during the first quarter of 2017 and are subject to standard conditions set out for transactions of this type. The “New” Avio company will be listed on the Italian Stock Exchange by March 2017;
  • Agreement between Leonardo and B Futura for safety in Serie B football league stadiums. On 20 December 2016 Leonardo and B Futura, a company that is wholly owned by the Italian Serie B Professional Footballers League and that is dedicated to the development of sports facilities infrastructures, signed a three-year Memorandum of Understanding whereby Leonardo offers its experience of safety services for new stadium construction projects and training facilities and the modernisation of existing stadiums and facilities;
  • Acquisition of Sistemi Dinamici SpA and expansion in unmanned systems. On 23 December 2016 Leonardo acquired the remaining 60% of the share capital of Sistemi Dinamici from IDS S.p.A.. With this transaction, Leonardo acquires 100% of Sistemi Dinamici S.p.A. and gains full control over the Unmanned Hero programme, thus further increasing its commitment in this sector;
  • Disposal of DRS business units. in December 2016, DRS Technologies completed the disposal of the Environmental Systems business unit, concerning the Naval Power LoB, within the scope of the review of the portfolio of activities and the disposal of non-core businesses;
  • SuperJet Programme: during the year Leonardo and United Aircraft Corporation (“UAC”, a company owned by the Russian Government) reached an agreement on the reorganisation of the Superjet programme, which entailed the exit of Leonardo from the capital of Sukhoi Civil Aircraft Corporation (“SCAC”). This is a Joint Venture based in Russia, which is responsible for the development, manufacturing and sale of the aircraft in Russia and Asian markets. The operation also entailed the acquisition of control by the Russian partner over Superjet International, based in Italy, which is responsible for the sale on Western markets and after-sales service all over the world. The transaction also entailed an agreement on the repayment and rescheduling of JV Superjet International’s debt to the Leonardo Group, backed by specific bank guarantees;
  • Completion of the acquisition of Daylight Solutions. On 7 March 2017 Leonardo signed, through the IS subsidiary DRS Technologies, an agreement for the acquisition of Daylight Solutions Inc, world leader in the development of Quantum Cascade Laser products. This acquisition will enable the expansion of DRS’ offer within the advanced solutions for the civil and military market.

Financial transactions. In 2016, the Leonardo Group did not carry out any significant transaction on the financial market.

It should be noted that the Group’s bonds are governed by rules with standard legal clauses for these types of corporate transactions on institutional markets that do not require any undertaking with regard to compliance with specific financial parameters (financial covenants) but they do require negative pledge and cross-default clauses. Based on negative pledge clauses, Group issuers, Leonardo and their “Material Subsidiaries” (companies in which Leonardo owns more than 50% of the share capital and the gross revenues and total assets of which represent at least 10% of Leonardo’s consolidated gross revenues and total assets) are expressly prohibited from pledging collateral security or other obligations to secure their debt in the form of bonds or listed financial instruments or financial instruments that qualify for listing, unless these guarantees are extended to all bondholders. Exceptions to this prohibition are securitisation and, starting from July 2006, the establishment of assets for the use indicated in Article 2447-bis et seq. of the Italian Civil Code. On the contrary, the cross-default clauses give the bondholders the right to request early redemption of the bonds in their possession in the event of default by the Group issuers and/or Leonardo and/or any “Material Subsidiary” that results in a failure to make payment beyond pre-set limits.

Furthermore, the €mil. 2,000 Revolving Credit Facility contains financial covenants. More specifically, the covenants require Leonardo to comply with two Financial ratios (the ratio of Group net debt - excluding payables to the joint ventures MBDA and Thales Alenia Space - to EBITDA must be no higher than 3.75 and the ratio of EBITDA to net interest must be no lower than 3.25) tested annually based upon the consolidated data at the end of the year. These covenants, in accordance with contractual provisions providing for this option, have also been extended to the EIB loan, currently outstanding in the amount of about €mil. 280, in addition to certain loans recently granted to DRS by US banks totalling USDmil. 75. In relation to this Annual Financial Report, there was full compliance with said covenants (the two ratios are 1.3 and 7.3, respectively).

Outstanding bond issues are given a medium/long-term financial credit rating by the three international rating agencies: Moody’s Investors Service (Moody’s), Standard & Poor’s and Fitch. At the date of presentation of this report, Leonardo’s credit ratings, compared to those preceding the last change, were as follows:

Agency Last update UpdatedPrevious
Credit RatingOutlookCredit RatingOutlook
Moody'sAugust 2015Ba1stableBa1negative
Standard&Poor'sApril 2015BB+stableBB+negative
FitchOctober 2016BB+positiveBB+stable
   

With regard to the impact of positive or negative changes in Leonardo’s credit ratings, there are no default clauses linked to the credit ratings. The only possible effects deriving from further changes, if any, to the credit ratings refer to higher or lower finance costs on certain payables of the Group, especially with reference to the Revolving Credit Facility. The interest rates applied to the utilisations of such credit line, in fact, are based upon the EURIBOR plus a margin of 100 bps. This margin could be reduced down to a minimum of 50 bps if Leonardo returns to an investment grade rating or increased up to a maximum of 220 bps if Leonardo’s debt is given a rating below BB or if it is given no rating at all. Finally, it should be noted that the Funding Agreement between MBDA and its shareholders provides, inter alia, that any downgrade of the rating assigned to the shareholders will result in a gradual increase in the margins. Additionally, under a pre-set rating limit (for at least two out of three rating agencies: BB- from Standards & Poor's, BB- from Fitch and Ba3 from Moody’s) MBDA is entitled to determine the applicable margin each time. Finally, the agreement provides for rating limits the achievement of which allows MBDA to request the issue of a bank guarantee of its own liking from its shareholders, without which MBDA can suspend the subsequent disbursement of funds.