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S&P downgrades Rolls-Royce credit rating after bribery settlement

Reuters
FILE PHOTO - The setting sun reflects on a building at Rolls-Royce in Derby, central England , November 4, 2014. REUTERS/Darren Staples/File Photo

LONDON (Reuters) - Ratings agency S&P downgraded Rolls-Royce's (RR.L) long-term corporate credit rating on Tuesday, responding to news last week that the aero-engine maker would pay out 671 million pounds ($835 million) to settle a bribery investigation.

S&P said it now rated Rolls-Royce 'BBB+', down from 'A-'. It added the outlook was stable and it saw profits recovering in 2017.

Shares in Rolls traded down 1.6 percent to 679.8 pence following the ratings cut, underperforming Britain's bluechip index (.FTSE) which was up 0.2 percent and erasing gains made by the stock over the week since the bribery case was settled.

As well as announcing the settlement payable over five years with British, U.S. and Brazilian authorities, Rolls said that 2016 profit would beat forecasts.

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S&P said its view was that Rolls now had a "modest" financial risk profile compared with its former classification of "minimal", adding the company's debt-to-core earnings (EBITDA) ratio would rise to 2.1 times from the 1.4 it had expected.

But the agency suggested the downgrade could be short-term.

"Rolls-Royce's financial risk profile is constrained by weaker-than-expected leverage metrics, especially in 2016; high levels of capex and research and development spending; historical working capital outflows; and the cash disbursement of fines," S&P said.

"We expect leverage metrics to improve in 2017 from 2016," it added.

The ratings cut is the latest blow for Rolls-Royce, which in 2014 and 2015 issued a string of profit warnings. CEO Warren East, who joined in mid-2015, has since led a drive to slash costs and turn the company around.

A spokesman for Rolls-Royce, which also makes engines for ships and military jets, said the company maintained a regular dialogue with ratings agencies.

"We ... do not comment on individual ratings actions," he added.

Rolls will release its 2016 results on Feb. 14.

($1 = 0.8033 pounds)

(Reporting by Sarah Young; Editing by Paul Sandle and Mark Potter)