Rolls-Royce Holdings PLC (LSE:RR.) has had its long-term credit rating upgraded to BB+ by Fitch Ratings in another step towards regaining BBB investment-grade status.
Fitch noted the efforts of chief executive Tufan Erginbilgic in steering the iconic UK aerospace company through a period of financial turbulence.
The rating upgrade was underpinned by Rolls-Royce's “ambitious but broadly achievable” financial targets, aiming for an operating profit of as much as £2.8 billion and free cash flow of up to £3.1 billion by 2027.
“The upgrade reflects Fitch's belief that the company's key financial metrics, already above the previous upgrade sensitivities, will continue to sustainably improve in the short to medium term and increasingly reflect investment-grade levels,” said Fitch.
The agency's confidence in Rolls-Royce's ability to meet these targets reflects positively on Erginbilgic's strategic direction and operational efficiency.
Rolls-Royce lost its investment-grade rating during the pandemic, when the aviation industry faced unprecedented challenges as the entire industry came to a standstill.
But the turnaround strategy spearheaded by Erginbilgic is evidently working.
Not only has the company's share price more than tripled this year, but there is also a noticeable shift in investor sentiment towards the stock.
According to Fitch, Rolls-Royce’s earnings margins, free cash flow, leverage and market demand are all trending in the right direction.
“Rolls-Royce's established prime contractor status for wide-body engine manufacture and position on long-term defence programmes mean it will continue to benefit from the recovery of wide-body aircraft production and overall global growth in defence expenditure driven by geopolitical conflicts and tensions,” said Fitch.
Shares rallied 2.2% following the upgrade.