Finmeccanica's involvement in Avio could draw the company into a financial trap, according to credit-rating agency Moody's. The Italian group took a 30% stake in Avio (formerly Fiat Avio) earlier this year, with the rest of the company going to the US private equity firm Carlyle Group (Flight International, 8-14 July).

As long as Finmeccanica continues to operate only as a minority shareholder, Moody's aerospace analyst Tassos Philippakos says that the investment should be small enough not to worry the company. But he says that "if Finmeccanica's participation in Avio expands significantly over the medium term, its credit quality could come under pressure".

Carlyle is negotiating to buy German engine manufacturer MTU from DaimlerChrysler, and may, if the sale goes ahead, attempt to merge the two engine manufacturers, as it merged two previous acquisitions - Aerostructures and Vought Aircraft Industries - earlier this year.

But the Italian government may not back this, having urged Finmeccanica to ensure continued Italian ownership of Avio, viewed as a strategic industry.

If, to keep partial control, Finmeccanica spends more on increasing its investment in Avio, it would not be able to use the money - including that raised via a recent bond offering - to reduce or restructure its existing debt load, now up to €346 million ($392 million) after an acquisition spree in late 2002 and early 2003 that saw the group acquire virtually every major Italian aerospace company.

"Imprudent use of proceeds from the recent note offering could also place pressure on the company's credit quality," Philippakos says.

Source: Flight International