CORPORATES

CREDIT OPINION30 March 2020

Update

RATINGS

MTU Aero Engines AGDomicile Germany

Long Term Rating Baa3

Type LT Issuer Rating - DomCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Christian Hendker,CFA

+49.69.70730.735

Associate Managing Directorchristian.hendker@moodys.com

Stanislas Duquesnoy +49.69.70730.781Senior Vice Presidentstanislas.duquesnoy@moodys.com

Marcella Pavesi +49.69.70730.742Associate Analystmarcella.pavesi@moodys.com

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

MTU Aero Engines AGUpdate to credit analysis

SummaryMTU posted a solid 2019 operating performance and ended the year strongly positioned inits rating category with a Moody's adjusted Debt/EBITDA of around 2.0x. However we see anincreasing risk of credit metrics deteriorating sharply in 2020 as the result of the coronavirusoutbreak and its impact on MTU's commercial activities notwithstanding that visibility iscurrently poor. On 23 March 2020 MTU announced the stop of production in several facilitiesin Europe for the next three weeks starting from 30 March, as well as the suspension of itsMRO activities in Hannover and Ludwigsfelde from the following week. While we expect thecompany to have built sufficient stock of engines to support OEMs' production for the comingthree weeks, if the closure was to be pursued beyond the next three weeks it could negativelyimpact MTU's performance and liquidity, as well as the overall supply chain. We will continueto monitor the situation closely in the coming weeks in order to assess any potential impacton MTU's credit metrics and liquidity as well as on its rating.

MTU Aero Engines AG's (MTU) Baa3 rating remains supported by (1) the company'sestablished position as a global supplier of engine components and subsystems, and the largestindependent provider of aircraft engine maintenance, repair and overhaul (MRO) servicesworldwide; (2) high revenue visibility supported by strong backlog (equivalent to aroundfour years of production based on 2019 sales); (3) strong demand from airlines for narrowbody aircrafts, especially A320 family equipped also with GTF engines; (4) improvement inprofitability over the past few years despite dilution from GTF ramp up.

At the same time the rating is constrained by (1) still modest Moody's FCF generation 1 ,albeit improving in the past two years and partly driven by discretionary capex; (2) growingshareholder remuneration; (3) relatively high concentration of in service fleet and orders insingle aisles, in particular in GTF engines; (4) risk that leverage will increase if MTU decide tooffset the dilution effect from the conversion of the outstanding convertible bond due 2023into equity; (5) the weaker liquidity than other investment grade peers.

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MOODY'S INVESTORS SERVICE CORPORATES

Exhibit 1

MTU's leverage ratio was strong for the Baa3 rating at YE 2019; uncertainty for 2020 is very highMoody's-adjusted gross debt/EBITDA (forecasts based on our assumption prior to the outbreak)

1.5x

1.7x

1.9x

2.1x

2.3x

2.5x

2.7x

2.9x

3.1x

3.3x

2015 2016 2017 2018 2019*

Debt / EBITDA

Downgrade pressure

Upgrade pressure

Sources: Moody's Investors Service, Moody's estimates

Credit strengths

» Strong order backlog

» Positive industry trend in civil aerospace prior to the coronavirus outbreak

» A recurring growing source of profit and cash flow from the MRO business

» Established market position, with a quasi-monopolistic structure

» Low interest payments because most of MTU's debt consists of a €500 million convertible bond

Credit challenges

» The coronavirus crisis is creating deep challenges for the commercial aviation sector, which could result in significant negative freecash flow, a weakening liquidity profile and a significantly higher leverage in 2020

» Weak FCF generation despite strong growth in earnings

» Concentration in the new GTF engine programs, although there is some exposure to widebody programs

» Risk of material cash expenses arising from potential issues with GTF engines

Rating outlookThe stable outlook continues to reflect our expectation that MTU’s key credit metrics will remain in line with the current ratingassigned and that MTU will maintain an adequate liquidity buffer on a sustained basis. The outbreak of the coronavirus creates materialuncertainty with regards to the metrics trajectory of MTU in 2020 and beyond and makes it difficult to feel comfortable about themaintenance of a stable outlook at this stage. An extended disruption of production could intensify negative rating pressure, howeverwe would offset potential benefits from operational or financial measures.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 30 March 2020 MTU Aero Engines AG: Update to credit analysis

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Factors that could lead to an upgrade

» Long-term improvements in MTU's business profile, reflected in increased scale or further diversification of the engine portfolio

» Sustained positive FCF generation, with FCF/debt in the high-single digits in percentage terms

» Moody's-adjusted gross leverage below 2.5x

» Retained cash flow (RCF)/net debt above 35%

» Strong liquidity

Factors that could lead to a downgrade

» Debt/EBITDA above 3.0x

» RCF/net debt below 25%

» Materially negative FCF generation (exceeding negative €100 million)

» Failure to maintain a sufficient liquidity buffer (€450 million-€500 million)

Key indicators

Exhibit 2

MTU Aero Engines AG

US Millions Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 [2]

Revenue 5,200 4,924 5,237 4,404 5,393 5,322

OPERATING PROFITS 311 287 372 489 624 651

Debt / EBITDA 2.8x 3.0x 3.2x 2.5x 2.1x 2.0x

RCF / Net Debt 17.4% 33.5% 39.5% 38.9% 55.3% 53.7%

EBIT / Interest Expense 4.8x 4.6x 6.5x 8.6x 10.3x 9.7x

Free Cash Flow (FCF) -153 -152 -84 -20 47 90

FCF / Debt -10.8% -11.5% -4.5% -1.2% 2.6% 5.1%

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.[2] Preliminary calculation based on Q4-19 and FY2019 presentationSource: Moody's Financial Metrics™

ProfileMTU Aero Engines AG (MTU) is headquartered in Munich, Germany, and its shares have been publicly listed since 2005 with a currentmarket capitalization of around €10 billion. In 2019, its revenue amounted to €4.6 billion and company reported EBIT was €757 million(16.4% margin).

MTU’s range of activities extends from development, manufacturing and marketing to maintenance of commercial and military aircraftengines. It is one of the major international companies in the industry and cooperates with leading original equipment manufacturers(OEMs) — GE Aviation, Pratt & Whitney (United Technologies Corporation) and Rolls-Royce plc. The group has two operating segments:(1) the OEM business, consisting of the commercial business (33% of 2019 revenue) and the military business (10%), which covers newcommercial engines, including spare parts, and the whole of the military sector; and (2) the commercial MRO business (57%), whichprovides MRO services for aircraft engines. The MRO business primarily services airlines.

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Exhibit 3

MTU's revenue split by business segment2019

Exhibit 4

MTU's management-adjusted EBIT breakdown2019

Commercial OEM33%

Military OEM10%

MRO57%

Source: MTU Q4-19 presentation

Original equipment manufacturing (OEM)66%

Maintenance, repair and overhaul (MRO)34%

Source: MTU Q4-19 presentation

Detailed credit considerationsThe coronavirus crisis represents a key credit riskThe rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset pricedeclines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of thesedevelopments are unprecedented. While some sectors, such as the airlines industry, have been materially impacted as demand droppeddramatically, the outbreak of the virus has also resulted in a slow down or temporary shut down of production in many countries allother the world as manufacturers need to comply by higher safety standards in order to protect the health of their employees. This couldultimately results also in a disruption of the supply chain, as well as high liquidity needs.

On 23 March 2020 MTU announced a production interruption in several facilities in Europe for the next three weeks starting from 30March, as well as the suspension of its MRO activities in Hannover and Ludwigsfelde from the following week. We understand that thisdecision was made in order to ensure the safety of workers, also following the decision of the Bavarian authorities to lock down the federalstate, as well as due to unstable material supplies. We expect MTU to have built sufficient engines' stock to support OEMs' productionfor the coming three weeks. However, if the closure of the original equipment factories and the MRO activities was to be prolonged wecannot exclude that MTU's performance and liquidity, as well as the overall supply chain, will be negatively impacted.

In this context, we expect that MTU will take several actions to protect profitability and liquidity in the short term. Potential actions mayinclude reduction in discretionary spending as well as shortened working hours (‘Kurzarbeit’) following the parliamentary vote to easethe access to this scheme in Germany three weeks ago.

At the same time, based on 2019 performance MTU is strongly positioned in the current rating category and is part of key engine programswith robust demand fundamental. Therefore the company has some flexibility to absorb the suspension of production and MRO activitiesfor the next three weeks. However, we will continue to monitor the company's liquidity and supply chain closely in order to assess theimpact of the coronavirus outbreak on MTU's current rating.

Strong order backlog and positive industry trend, albeit lower airlines' profitability in 2020 due to coronavirus's outbreakmight impact deliveries' profileThe growth in global air passenger traffic has supported the demand for aircraft and engines. Both The Boeing Company and Airbus SEhave large order backlogs equal to 7x-8x their last annual production. However, the airlines sector has been severely impacted by thecoronavirus outbreak in 2020 due to its exposure to travel restrictions and sensitivity to consumer demand and sentiment, resulting inweakening earnings and credit metrics for the airlines. This could also result in lower deliveries in 2020.

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Exhibit 5

Strong backlog provided high revenue visibility prior to the outbreak

0.0x

2.0x

4.0x

6.0x

-

1,000

2,000

3,000

4,000

5,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Backlo

g (

Aircra

ft U

nits)

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Ba

cklo

g (

Air

cra

ft U

nits)

Airbus (Left Axis) Boeing (Left Axis) Backlog to LTM Production (Right Axis)

Backlog/LTM production increased in 2019 due to the slow down of production of the 737MaxSource: Airbus, Boeing

At the same time, the high backlog underlines the strong demand for more efficient aircrafts, especially for narrow bodies, in particularfor the A320neo family. We positively notice that around half of these aircrafts are likely to be equipped with PW1100G-JM engines (GTFengine family), which were developed in partnership with Pratt & Whitney and where MTU holds an 18% production share. In the GTFprogram, MTU is responsible for developing and manufacturing the high-speed low-pressure turbine, the front half of the high-pressurecompressor and four brush seals. MTU also carries out the final assembly of 30% of all engines.

MTU operates in a market with quasi-monopolistic traits and is well positioned to benefit from favorable demand fundamentals.Additionally, we expect MTU to continue to benefit from ever-improving standards and demand for fuel efficiency. The GTF engines forregional and medium-haul jets are likely to reduce fuel consumption by at least 15% compared with previous engine models. Similarly,the GE9X model for the widebody Boeing 777X (market launch is expected in 2020) is likely to reduce fuel consumption by around 10%compared with its predecessor. The economic benefits of reducing fuel consumption and the need to reduce noise pollution and CO2

emissions will drive the demand for technologically more advanced solutions.

But it is not just the OEM business that is benefiting from the growing industry demand. Revenue in the MRO business grew even strongerin recent years and contributed 57% to MTU's sales in 2019 compared with 33% five years earlier. As the largest independent engineMRO service provider with the largest engine MRO portfolio of all providers, the group provides broad market coverage in cooperationwith both OEMs and airlines. To keep up with demand, MTU has expanded its MRO network. An important milestone in this regard is theconstruction of a new MRO shop for GTF engines in Poland in 2020 via EME Aero, MTU's 50-50 joint venture with Lufthansa Technik,which also supports cost structure improvements. MTU has also teamed up with China Southern (50-50 joint venture), creating MTUMaintenance Zhuhai in 2001, the leading commercial MRO service provider in China, the world's fastest-growing MRO market. Giventhe strong growth in China (China Southern intends to double its aircraft fleet by 2035), MTU targets to increase its capacity by another50%, expanding its offering to new engine platforms.

As 70%-80% of new engines are sold with OEM maintenance contracts, the MRO business provides a relatively stable source of revenuewith good visibility and we expect it to continue to gain in importance for the overall group's results. Also through its stake (4%) in theGE9X engine program, MTU secured itself participation in the future aftermarket business.

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MOODY'S INVESTORS SERVICE CORPORATES

Exhibit 6

In the last several years, revenue mix shifted toward MROExhibit 7

Commercial MRO backlog expanded strongly

54%, 2,11633%, 1,537

13%, 532

10%, 459

33%, 1,299 58%, 2,711

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2014 2019

€ m

illio

n

Commercial OEM Military OEM MRO

MRO = Maintenance, repair and overhaul.Source: MTU

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2014 2015 2016 2017 2018

€m

illion

Source: MTU

MTU's military revenue (10% of group sales) increased by 6% in 2019 and the company expects revenue to increase by mid single digitin 2020. We expect the company to benefit from the increase in defense budgets in NATO states. In addition, the development of theNext European Fighter engine, together with Safran, could lead to additional revenue from 2040 onward.

Credit metrics have improved on the back of strong operating results in 2019The group's operating results were strong in 2019 — revenue was up 1.3% to €4.6 billion, boosted by commercial OEM (up 10%) andmilitary (up 6%) segments compensating for a slight decline in MRO revenue (down 3%). Debt/EBITDA declined to around 2.0x in 2019from 2.1x in 2018. At the same time, Moodys adjusted EBITDA margin increased to around 16.5% in 2019 from 16.2% in 2018, includingthe dilution of the continued ramp up of GTF engines.

The lower sale in the MRO division was due to the change in the invoicing process for V2500 maintenance work carried on behalfof International Aero Engines AG (IAE), a consortium including Pratt & Witney, MTU and Japan's Aero Engine Corp. In the past, themaintenance work for e.g. Asian customers was carried out by MTU Zhuhai (at equity consolidated), but invoiced by MTU Hannover(fully consolidated) that subcontracted MTU Zhuhai. Starting 2019 MTU Zhuhai has been directly contracted by IAE. As a result, thecorresponding revenues and costs were de-consolidated and profit will be accounted for using the equity method and, thus, outside of thecompany's Moody's-adjusted EBITDA, which excludes contributions from joint ventures. Despite the impact of this accounting treatmentand the increase in the pension deficit, MTU's key metrics in 2019 remained strong.

In 2019 Moody's FCF was just below €100 million up from €40 million in 2018, mainly supported by lower WC needs. At the sametime, we expect FCF to remain volatile due to the continued ramp up of GTFs engines production and the development of new engines,which is costly and occurs once in 20-30 years. In the last four years, MTU managed to increase its earnings (company reported) by over90% to €757 million. However, higher investments in working capital, capital spending and growing dividends — as well as still-materialpayments for the settlement of purchase-price liabilities for the PW1000G and PW800 program shares and the V2500 stake increase(around €78million in 2017, which MTU reports in cash flow from financing activities, but we consider a capital spending-like item) —resulted in negative FCF generation (Moody's adjusted). Also last year, despite a 20% surge in EBITDA (Moody's adjusted), the group'sFCF stayed close to breakeven.

Based on the 2020 guidance and excluding the impact of the coronavirus outbreak we would have expected company's leverage to staybetween 2.2x-2.7x and EBITDA margin to reduce by around one percentage point due to the dilution from an acceleration of shop visitexpected for the MRO business. We also assumed that MTU would have financed the share buy back to reduce the equity dilution relatedto the conversion of the convertible bond mostly via debt. However, with the outbreak of the coronavirus the level of uncertainty is highand we do not exclude a sharp deterioration in credit metrics if the outbreak lasts well into Q2 2020 and possibly beyond.

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Liquidity analysisWe view MTU’s overall liquidity as adequate, supported by a €600 million revolving credit facility (RCF), which was extended by anadditional year in 2018 and now runs until October 28, 2023, and €140 million of cash & marketable securities as of the end of 2019.The company's €600 million RCF is fully undrawn. We also understand that MTU is currently in the process of raising additional fundsto build up some more buffer in the context of the current coronavirus outbreak. We also positively notice that there are no materialupcoming debt maturities.

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Rating methodology and scorecard factorsThe principal methodology used in rating MTU was the Global Aerospace and Defense Industry methodology, published in March 2018.The scorecard indicated outcome is Baa2 for 2019 and Baa3 based on our 12-18-month forward view. The forward view indicated outcomereduced by one notch reflecting the deterioration of the metrics in 2020 due to the coronavirus outbreak.

Exhibit 8

Rating factorsMTU Aero Engines AG

Aerospace / Defense Industry Scorecard [1][2]

Factor 1 : Scale (25%) Measure Score Measure Score

a) Total Revenue (USD Billion) $5.3 Baa $3.5 - $4.5 Baa

b) Operating Profit (USD Billion) $0.7 Ba $0.3 - $0.5 Ba

Factor 2 : Business Profile (20%)

a) Competitive Position Ba Ba Ba Ba

b) Expected Revenue Stability Baa Baa Baa Baa

Factor 3 : Leverage and Coverage (35%)

a) Debt / EBITDA 2.0x Baa 3.5x - 5x B

b) Retained Cash Flow / Net Debt 54.0% Aa 20% - 40% A

c) EBIT / Interest 9.8x Aa 7x - 9x A

Factor 4 : Financial Policy (20%)

a) Financial Policy Ba Ba Ba Ba

Rating:

a) Indicated Outcome from Scorecard Baa2 Baa3

b) Actual Rating Assigned Baa3

Current

LTM 12/31/2019

Moody's 12-18 Month Forward View

As of 3/27/2020 [3]

(1) All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. (2) As of 12/31/2018; (3) This represents Moody'sforward view, not the view of the issuer, and unless noted in the text, does not incorporate significant acquisitions and divestitures.Source: Moody's Investors Service

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Appendix

Exhibit 9

Peer comparison

(in US millions)FYE

Dec-17

FYE

Dec-18

LTM

Dec-19

FYE

Dec-17

FYE

Dec-18

LTM

Dec-19

FYE

Jun-18

FYE

Jun-19

LTM

Sep-19

FYE

Dec-17

FYE

Dec-18

LTM

Sep-19

Revenue $4,404 $5,393 $5,368 $6,983 $7,222 $7,863 $6,168 $6,801 $9,690 $6,662 $7,260 $7,083

Operating Profit $489 $624 $654 $862 $869 $746 $983 $1,168 $1,483 $439 $600 $602

EBITDA $687 $873 $889 $1,097 $1,070 $962 $1,300 $1,506 $1,986 $708 $885 $848

Total Debt $1,849 $1,737 $1,785 $1,564 $2,335 $3,529 $4,750 $4,997 $8,966 $2,184 $1,999 $2,096

Cash & Cash Equiv. $127 $113 $162 $423 $774 $2,351 $288 $530 $1,001 $1,052 $942 $431

EBIT / Int. Exp. 8.6x 10.3x 9.6x 14.2x 7.8x 6.0x 5.2x 5.9x 6.5x 4.7x 7.9x 8.8x

Debt / EBITDA 2.5x 2.1x 2.0x 1.4x 2.2x 3.7x 3.7x 3.3x 4.5x 2.9x 2.3x 2.6x

RCF / Net Debt 38.9% 55.3% 54.0% 44.6% 34.8% 72.7% 15.0% 21.2% 9.3% 52.9% 53.2% 29.2%

FCF / Debt -1.2% 2.6% 5.8% 16.2% 19.3% 17.8% 12.8% 14.0% 5.7% 12.5% -6.6% 4.2%

MTU Aero Engines AG Spirit Aerosystems, Inc. L3Harris Technologies, Inc. Rheinmetall AG

Baa3 Stable Ba2 RUR-DNG Baa3 Stable Baa3 Stable

Metrics include Moody's standard adjustments. LTM = Last twelve months; FYE = Fiscal year end.Source: Moody's Financial Metrics

Ratings

Exhibit 10

Category Moody's RatingMTU AERO ENGINES AG

Outlook StableIssuer Rating -Dom Curr Baa3

Source: Moody's Investors Service

Endnotes1 Moody's-adjusted FCF is different from the company's definition because we include cash outflow from sales financing, dividends as well as payments for

purchase price liabilities and the V2500 stake increase.

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10 30 March 2020 MTU Aero Engines AG: Update to credit analysis

This document has been prepared for the use of Thomas Kröll and is protected by law. It may not be copied, transferred or disseminated unlessauthorized under a contract with Moody's or otherwise authorized in writing by Moody's.

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11 30 March 2020 MTU Aero Engines AG: Update to credit analysis

This document has been prepared for the use of Thomas Kröll and is protected by law. It may not be copied, transferred or disseminated unlessauthorized under a contract with Moody's or otherwise authorized in writing by Moody's.