Lower margins put FKI in junk status danger

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The engineering company FKI was under threat of having its credit downgraded to junk status yesterday on concerns over its eroding margins.

Shares in the company, which specialises in the automotive and aerospace industries, slumped more than 5 per cent during the day on the news from Moody's, the ratings agency. They closed 3 per cent down at 108.5p, giving the company a market capitalisation of £631m.

Moody's said late on Monday night that it may revise FKI's Baa3 rating, on fears over "the continuing margin erosion in all of FKI's businesses, in particular in energy technology and FKI Logistex".

The group, under its chief executive, Paul Heiden, has been struggling against a global downturn in engineering, and earlier this year came close to breaching its banking covenants. It is in the midst of a strategic review.

Moody's wants to scrutinise FKI's outlook for orders in the company's core business and review its potential for further cost savings. The ratings agency will also assess FKI's ability to pay down its debts at a faster rate.

Despite the fall in shares, many in the City were surprised at Moody's action. Michael Blogg, an analyst at Arbuthnot Securities, said: "This is complete nonsense and is another example of a ratings agency spotting a problem when it is already on the way to being sorted out. FKI has renegotiated its banking arrangements ... The second half seems to have picked up and next year should be a bit better."

Analysts at Lehman Brothers agreed, calling Moody's approach to the company throughout the year "wholly inconsistent", having judged FKI to have a stable outlook as recently as November.