Atlas Copco AB -- Moody's upgrades Atlas Copco to A2/Prime-1; outlook stable

Frankfurt am Main, November 15, 2012 -- Moody's Investor's Service has today upgraded to A2 from A3 the senior unsecured long-term rating of Atlas Copco ("the group"). In addition, Moody's has upgraded to Prime-1 from Prime-2 the short-term rating for the group's commercial paper and MTN programs. The outlook on the ratings was changed to stable from positive.

RATINGS RATIONALE

"The upgrade reflects Atlas Copco's continuous improvement in operating performance and strong credit metrics in line with an A2 rating," said Oliver Giani, Vice President at Moody's and lead analyst for Atlas Copco. "Although market demand -- and therefore AtlasCopco's performance - is likely to decline somewhat from the high level seen in the previous quarters, we expect Atlas Copco to maintain solid metrics commensurate with the current rating, such as EBITA margin well above mid teens and leverage materially below 2.0x debt/EBITDA. We also expect the group to continue to pursue a conservative financial policy, as reflected in historical retained cash flow-to-net debt ratios which have stayed above 40% during the last three years. The rating incorporates the expectation that this level will be maintained going forward and that substantial shareholder distributions or large acquisitions, which would lead to ratios below that level, would only be temporary."

Driven by very strong operating performance, Atlas Copco has met all the upgrade triggers set for an A2 rating, with the exception of FCF coverage, which temporarily weakened in 2011 due to higher working capital requirement. For the last twelve months ended September 2012, EBITA margin reached nearly 22% and leverage stabilized at the solid level of 1.2x debt/EBITDA. Cash flow generation has continuously improved, resulting in above 55% retained cash flow-to-net debt and 10% free cash flow-to-debt. Compared to the peak level seen in September 2008, net debt has been materially reduced by SEK10.4 billion to SEK17.2 billion as per September 2012. Even during the severe market downturn 2009, Atlas Copco was able to maintain a very resilient EBITA margin of above 16%. These metrics provide Atlas Copco's rating with sufficient headroom for weaker performance or increased shareholder distribution.

Over the medium term, we expect Atlas Copco to sustain its solid operating performance and strong cash flow generation, given its flexible cost structure, high share in more stable and profitable service business (ca. 40%), global footprint with enhanced presence in fast-growing markets (with above 50% of sales and order intake generated from Asia/Australia, Africa/Middle East and South America). Uncertainty in financial policy, especially the resumption of substantial shareholder distributions, remains the main risk for the rating going forward.

The A2 / Prime-1 ratings are supported by (i) Atlas Copco's globally leading market position in most of its operations and the resulting pricing power; (ii) its well diversified customer base and global presence with strong position in growth markets; as well as (iii) the high degree of operating flexibility and a large share of more stable and profitable aftermarket business, which has driven strong and stable earnings and cash flow generation throughout the cycle.

The ratings are constrained by: (i) the group's low sales visibility due to its shorter-cycle business portfolio, with short lead time and low advance payments; (ii) its relatively high exposure to cyclical end markets as reflected in high sales volatility during the recent downturn, and (iii) high dividend payouts and -- from time to time -- the resumption of sizeable share redemption programs, as done in the second quarter of 2011.

The stable outlook reflects our expectation that Atlas Copco will stick to a conservative financial policy and maintain an adequate capital structure, as reflected in retained cash flow-to-net debt above 40% over a cycle and leverage materially below 2.0x debt/EBITDA. Despite the weakening market demand in the near term, we also anticipate the group to sustain its solid operating performance, such as EBITA margin well above mid teens.

We would consider raising the rating if Atlas Copco could sustainably improve its credit metrics to a level exceeding our guidance for a higher rating, as well as demonstrate a stronger commitment to a conservative financial policy. This would be indicated by retained cash flow-to-net debt well above 50% and leverage below 1.0x debt/EBITDA, all on a sustainable basis.

Conversely, downward pressure on the rating could develop, should we see a substantial increase in Atlas Copco's overall net debt driven by the resumption of substantial shareholder returns or large debt-financed acquisitions, or a severe weakening of its operating profitability. This would be evident by retained cash flow-to-net debt falling consistently below 40% and debt/EBITDA exceeding 2.0 times. We would also consider a negative action if EBITA margins weakened to mid teens.

The principal methodology used in rating Atlas Copco AB was the Global Heavy Manufacturing Rating Methodology published in November 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Stockholm, Sweden, Atlas Copco AB is an international manufacturer of compressed air and gas equipment, generators, industrial tools and assembly systems as well as a large variety of construction and mining equipment, and also provides related aftermarket and rental services. Atlas Copco operates through its four business segments: Compressor Technique (39% of group sales 2011); Industrial Technique (9.6%); Mining and Rock Excavation Technique (36%); and Construction Technique (16%). The group is considered the market leader in most of its business segments and generated sales of SEK90.1 billion (EUR10.7 billion) for LTM ending September 2012. Atlas Copco is publicly listed and its largest shareholder, Investor AB, held nearly 17% of shares as of 30 June 2012.

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Oliver Giani Vice President - Senior Analyst Corporate Finance Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Matthias Hellstern Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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