Moody's upgrades Rheinmetall to Baa1 with stable outlook

Investing.com -- Moody's Ratings has upgraded Rheinmetall AG's (ETR:RHMG) long-term issuer rating to Baa1 from Baa2, while affirming its P-2 short-term ratings with a stable outlook. This upgrade reflects the German defense contractor's robust operating performance since April 2022, demonstrated by nearly doubled revenue and a record €55 billion order backlog.

Rheinmetall projects its sales will reach €20 billion by 2027, double its current level, driven by sustained high demand for defense products. The company's strategic shift toward defense has strengthened its market position, with the current order backlog representing 5.6 times its 2024 annual sales.

Despite significant capital expenditures totaling €732 million in 2024 and acquisitions worth nearly €2 billion, Rheinmetall's leverage has decreased. Moody's-adjusted gross debt to EBITDA improved to 1.7x in 2024 from 2.0x in 2021, as earnings growth outpaced debt increases.

Rheinmetall anticipates a 60-70% increase in capital expenditures for 2025, expected to be a peak investment year. However, ongoing European defense discussions could sustain high investment levels beyond 2025, potentially enhancing the company's growth trajectory.

The company's financial structure includes two €500 million convertible bond tranches maturing in 2028 and 2030, with the first tranche actively converting to equity. This conversion could reduce Rheinmetall's debt load, as the company does not plan to counter with debt-funded share buybacks.

Rheinmetall maintains conservative financial management with net leverage at 0.7x as of end-2024 and a target leverage range of 1-3x. The company prioritizes maintaining its Investment Grade rating while preserving flexibility for growth opportunities in the evolving European defense industry.

The Baa1 rating is supported by Rheinmetall's leading market position, defense business resilience, and supportive environment in European NATO states. Rating constraints include scale limitations compared to peers, large growth investments, cash flow volatility, and increasing shareholder remuneration.