Leonardo's Credit Outlook Soars as Defense Spending Fuels Growth
2min read Moody’s Investors Service has upgraded Leonardo S.p.A.’s outlook to positive from stable, signaling renewed confidence in the Italian aerospace and defense giant’s ability to capitalize on soaring global defense spending and strengthen its financial resilience. The move reflects Leonardo’s transformation into a leaner, more agile player, driven by robust operational performance, strategic partnerships, and a disciplined focus on deleveraging. With European NATO members accelerating military modernization, Leonardo stands at the forefront of a sector poised for sustained growth—though risks persist.
The Financial Turnaround: Numbers That Matter
Leonardo’s improved credit profile hinges on unwavering financial discipline. Since its Baa3 rating upgrade in May 2023, the company has reduced its adjusted gross leverage to 2.7x by the end of 2024, a sharp drop from 3.5x in 2023. A planned €500 million bond repayment in March 2025 will push this ratio further to 2.4x, comfortably below Moody’s 3.0x trigger for a potential rating upgrade.
Revenue surged 21% in 2024 versus 2022, while Moody’s adjusted EBITDA jumped 28%, fueling free cash flow of nearly €1 billion over two years. This liquidity buffer, combined with a €1.6 billion cash balance, positions Leonardo to weather volatility while pursuing strategic investments.
Defense Spending Surge: Tailwinds from Geopolitical Tensions
Leonardo’s growth is inextricably linked to European defense spending, which Moody’s expects to rise by 8% annually through 2027. The company’s core markets—aircraft systems, cybersecurity, and unmanned aerial vehicles (UAVs)—are directly benefiting from NATO’s pledge to spend 2% of GDP on defense.
Key partnerships are amplifying this momentum:
- Rheinmetall AG: Joint ventures in tank and military vehicle production solidify Leonardo’s role in land systems modernization.
- Baykar: Collaboration on drone technology taps into global demand for autonomous combat systems, a sector expected to grow at 7.5% CAGR through 2030.
Navigating Risks: A Balancing Act
Despite these positives, Leonardo faces challenges. Its Aerostructures division and the TelCo business (part of the Thales-Alenia Space joint venture) reported losses in 2024, requiring management’s attention. While these issues are manageable, they underscore the need for continued cost discipline.
Geopolitical risks also linger. Trade tensions and tariffs could disrupt supply chains, though Leonardo’s U.S. production hubs mitigate exposure. More critically, its 30.2% state ownership ties its credit rating to Italy’s sovereign score (Baa3). A downgrade of Italy’s rating below Ba1 would pressure Leonardo’s outlook—a scenario Moody’s deems unlikely but not impossible.
The Path Forward: Triggers for Further Upside
Moody’s positive outlook hinges on Leonardo maintaining:
- Debt/EBITDA below 3.0x, with margins stabilizing at high-single-digit levels.
- Consistent free cash flow and avoiding aggressive M&A that could strain leverage.
- European defense budgets remaining robust, with Italy’s sovereign rating holding firm.
Should these conditions hold, an upgrade to Baa2—one notch above Italy’s current rating—is feasible. Conversely, a debt ratio exceeding 4.0x or sustained losses in key divisions could reverse progress.
Conclusion: A Strategic Bet on Defense Resurgence
Leonardo’s upgraded outlook is no fluke. Its financial turnaround, strategic partnerships, and alignment with geopolitical tailwinds position it as a top-tier play in the defense sector. With €1 billion in free cash flow, a 2.4x leverage target, and growth catalysts like its Cyber and Space divisions, the company is well-equipped to capitalize on Europe’s defense boom.
While risks such as divisional underperformance and sovereign rating pressures loom, they are outweighed by the structural demand for advanced military tech. For investors, Leonardo represents a compelling balance of stability and upside—a stock to watch as global defense spending continues its ascent.
In the end, the numbers speak volumes: a 21% revenue surge, 28% EBITDA growth, and a deleveraging trajectory that outpaces peers all point to a company primed for sustained success. For now, the skies look clear for Leonardo.
