(The following statement was released by the rating agency) WARSAW/LONDON, October 24 (Fitch) Fitch Ratings has revised UK-based auto and aerospace group GKN Holdings plc's (GKN) Outlook to Positive from Stable. Its Long-term Issuer Default Rating (IDR) and senior unsecured ratings have been affirmed at 'BBB-' while the Short-term IDR has been affirmed at 'F3'. The Positive Outlook reflects Fitch's view that GKN's financial results, which over the past 18 months have been better than our expectations, could show continuous gradual improvement in the short- to medium-term, resulting in a financial profile firmly within the 'BBB' rating. Such an upgrade is possible in the next 12 to 18 months once Fitch has assessed the company's expected margin evolution, investment plans beyond 2015, cash deployment and its acquisition strategy. In particular, Fitch will focus on GKN's ability to generate sustainable free cash flow (FCF) to revenue above 2%. KEY RATING DRIVERS Improving Margins GKN improved its funds from operation (FFO) margin to over 10% since 2013, from 8.5% in 2012, due to strong cost management, the benefits of previous restructuring and an improved product mix. The LTM EBITDAR margin was also higher at 13.1%, versus 12.9% in 2013 and 12.5% in 2012. Fitch expects the EBITDAR and FFO margins to remain above 13% and 10%, respectively, in the foreseeable future. Robust Capital Structure The company's capital structure remains strong and in line with expectations for a 'BBB' rating. At end-1H14 gross leverage was firmly below 2x and is expected to remain so in the short to medium term. GKN also displays robust liquidity with high cash balances, ample committed credit lines and positive FCF. Net working capital-to-sales has remained fairly stable in recent years, at 9% of sales. This level is unlikely to change materially in the short-to medium-term given the company's continuous drive to improve working capital management. Moderate Free Cash Flows Despite rising core profitability, GKN's FCF margins, expected to be 2%-3% in 2014 and 2015, are moderate for the current rating and may fall under 2% in the medium- term, as a result of expansionary capital expenditure and rising dividend payments. However, Fitch considers that GKN has flexibility to reduce investment temporarily to bolster FCF in case of momentarily declining earnings. Demonstrating FCF margins consistently above 2% is an important consideration for an upgrade. Leading Market Positions GKN is the world's leading manufacturer by sales of driveline systems and sintered metals for precision components. It also has strong positions in aerospace equipment manufacturing. Aerospace Growth Near-term growth prospects for aerospace, GKN's most profitable and stable segment, are positive. While flat defence spending in GKN's key markets will curtail defence-related top-line growth, this is mitigated by expected continued strong growth in the commercial airline business in 2015 and beyond. GKN Aerospace has an order backlog of over GBP10bn. Fitch believes that an aerospace EBITDA margin of 15%, which was achieved in 2013, is sustainable RATING SENSITIVITIES Positive rating action may occur if GKN achieves a minimum FCF of 2% of revenues, FFO-based lease-adjusted gross leverage comfortably below 2x, cash flow from operations to sales of 8.5% and sustained EBITDAR margin of 13%. Downward rating pressure may result if FFO-based lease-adjusted gross leverage increases above 2.5x, FCF is negative and large debt-funded acquisitions and/or aggressive shareholder returns weaken the company's financial flexibility. Contact: Principal Analyst Eric Vogeler Associate Director +49 69 768076 243 Supervisory Analyst Tom Chruszcz Director +48 22 338 6294 Fitch Polska SA Krolewska 16 Warsaw 00-103 Committee Chair Emmanuel Bulle Senior Director +34 933 238 411 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: [email protected]. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 28 May 2014, are available at www.fitchratings.com. 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