LONDON (Reuters) - Ratings agency S&P downgraded Rolls-Royce's <RR.L> long-term corporate credit rating on Tuesday, responding to news last week that the aero-engine maker would pay out 671 million pounds ($835 million) to settle a bribery investigation.
S&P said it now rated Rolls-Royce 'BBB+', down from 'A-'. It added the outlook was stable and it saw profits recovering in 2017.
Shares in Rolls traded down 1.6 percent to 679.8 pence following the ratings cut, underperforming Britain's bluechip index <.FTSE> which was up 0.2 percent and erasing gains made by the stock over the week since the bribery case was settled.
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As well as announcing the settlement payable over five years with British, U.S. and Brazilian authorities, Rolls said that 2016 profit would beat forecasts.
S&P said its view was that Rolls now had a "modest" financial risk profile compared with its former classification of "minimal", adding the company's debt-to-core earnings (EBITDA) ratio would rise to 2.1 times from the 1.4 it had expected.
But the agency suggested the downgrade could be short-term.
"Rolls-Royce's financial risk profile is constrained by weaker-than-expected leverage metrics, especially in 2016; high levels of capex and research and development spending; historical working capital outflows; and the cash disbursement of fines," S&P said.
"We expect leverage metrics to improve in 2017 from 2016," it added.
The ratings cut is the latest blow for Rolls-Royce, which in 2014 and 2015 issued a string of profit warnings. CEO Warren East, who joined in mid-2015, has since led a drive to slash costs and turn the company around.
A spokesman for Rolls-Royce, which also makes engines for ships and military jets, said the company maintained a regular dialogue with ratings agencies.
"We ... do not comment on individual ratings actions," he added.
Rolls will release its 2016 results on Feb. 14.
(Reporting by Sarah Young; Editing by Paul Sandle and Mark Potter)