Dépêches

Fitch Downgrades Boeing to 'A/F1' from 'A+/F1'; Outlook Stable

Dépèche transmise le 28 janvier 2011 par Business Wire

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the Issuer Default Ratings (IDRs) for the Boeing Company (BA) and Boeing Capital Corporation (BCC) to 'A' from 'A+'. Fitch's ratings actions for both BA and BCC are summarized as follows:

--Long-term IDR downgraded to 'A' from 'A+';

--Senior unsecured debt downgraded to 'A' from 'A+';

--Bank facilities downgraded from 'A' to 'A+';

--Short-term IDR affirmed at 'F1';

--Commercial paper programs affirmed at 'F1'.

The Rating Outlook is Stable. The ratings cover approximately $12.4 billion of debt ($9 billion at BA, including approximately $360 million of non-recourse debt, and $3.4 billion at BCC).

The continued cash flow impact from delays in the 787 and 747-8 programs is the key driver of the downgrades. Inventory build and other costs from these two programs have weighed on the company's cash performance for three years, and this will continue in 2011, with 787-related assets on BA's balance sheet likely to increase another $6 billion to approximately $19 billion. Other 787 program risks and some weak credit metrics for the rating category also support the downgrades. There had been a limited margin of safety at the 'A+' rating level because delays in the 787 and 747-8 programs over the past several years have had a negative impact on BA's credit quality.

Fitch estimates BA's manufacturing free cash flow (FCF; cash from operations less capital expenditures and dividends), excluding BCC, was between breakeven and negative $500 million in 2010 and could reach negative $1 billion in 2011. Negative FCF in 2011 would mean BA could have negative FCF in three of four years from 2008-2011, which Fitch considers to be inconsistent with the standards of an 'A+' rating. BA could generate substantial cash flow once initial 787 deliveries begin, but Fitch is concerned with the apparently slow pace of such deliveries, which could delay the benefits of burning off accumulated inventories and could increase the risk of additional re-work of the substantial inventory being built prior to certification. While negative FCF is not typical of an 'A' category company, Fitch notes the nature of BA's cash outflows: the 787 and 747-8 are in essence startup businesses within BA that require an initial investment in working capital prior to revenue generation.

Additional rating concerns related to the 787 program include an aggressive production plan; the lack of visibility into supplier and customer claims resulting from the program's delays; uncertainty about the program's profit margins; and the integration of the new Charleston facility into BA's operations.

The Stable Outlook reflects favorable developments and conditions in other parts of BA's portfolio which have partly offset the impact of the developmental aircraft delays. The large commercial aircraft (LCA) market has clearly recovered, and BA has announced several production rate increases for the 737 and 777. BA's LCA orders were better than Fitch expected in 2010, with a book-to-bill ratio greater than 1 times (x) increasing the already large backlog. Including 787 and 747-8 deliveries, Fitch expects BA's LCA deliveries could rise 8% in 2011 and as much as 18% in 2012. Fitch expects U.S. core defense spending to rise in both 2011 and 2012, which should help BA's defense programs such as the F/A-18, and BA also has several substantial international defense contracts pending. BCC's overall portfolio quality should improve after Southwest Airlines Co.'s (rated 'BBB' with a Stable Outlook by Fitch) acquisition of AirTran Holdings, Inc. (BCC's largest exposure at approximately 27.5% of its portfolio), which Fitch believes will counter the impact of Mexicana Airline's bankruptcy.

Other rating concerns for BA include margin levels that are low for the rating category; the outlook for defense spending beyond fiscal 2012; and the susceptibility of the commercial aerospace industry to shocks such as terrorism and disease. Two major labor contracts that expire at the end of 2012 are also potential concerns, as are several litigation actions (including the A-12). Longer-term concerns include new competitors in the lower end of the narrow-body aircraft market.

BA's debt ratings are supported by the company's balanced business portfolio (approximately 50% defense and 50% commercial), liquidity position, financial flexibility, access to the capital markets, debt maturity schedule, competitive positions in both of its main business lines, large backlog, and high levels of defense spending. Longer term, the 787 program and the lessons learned during its development could prove to be a competitive advantage.

As of Sept. 30, 2010, BA's liquidity position, excluding BCC, was approximately $11.7 billion, consisting of $8.9 billion in cash and investments, and complete availability under $2.9 billion of bank facilities ($1 billion facility maturing in November 2012 and $1.876 billion facility maturing in November 2011). The company ended the quarter in a net cash position excluding non-recourse debt. For the latest 12 months (LTM) ending Sept. 30, 2010, BA's leverage (gross debt to EBITDA), excluding BCC, was 1.2x compared to 1.2x in 2009 and 0.6x for 2008. The deterioration in these metrics compared to 2008 was driven by the issuance of $5 billion of debt during 2009 to build liquidity. The preceding calculations exclude BCC by accounting for the subsidiary using the equity method, and non-recourse debt at BA is also excluded. The calculations also exclude non-cash charges, but include the impact of non-cash pension expense. BCC's complete financials for 2010 have not yet been released. Fitch expects BA's leverage metrics in 2011 to be consistent with the LTM metrics.

Fitch's ratings for BA incorporate expectations for limited cash deployment in 2011 beyond dividends (approximately $1.25 billion annually). Fitch expects BA will focus on maintaining a large liquidity position before addressing debt reduction, pension contributions, and share repurchases. The company has no material debt maturities until 2012. BA's pension funding percentage on a FAS basis was 83% at the end of 2010, but it was fully funded on an ERISA basis. Required pension contributions in 2011 and 2012 are modest.

BCC's ratings are linked to BA's ratings due to the existence of a support agreement and other factors such as transactional support provided to BCC by BA, but BA does not guarantee BCC's debt. A key rating driver for BCC's ratings is the continued support of BA. Additional important rating factors are BCC's ability to balance support of BA's aircraft sales with efforts to mitigate industry cyclicality and aircraft and obligor concentration risks and the susceptibility of the commercial aerospace sector to exogenous shocks such as terrorist acts or disease pandemics.

Additional information is available at 'www.fitchratings.com'

Applicable criteria and related research

-- '2011 Outlook: Global Aerospace and Defense' (Jan. 24, 2011);

-- 'Corporate Rating Methodology' (Aug. 16, 2010);

-- 'Global Financial Institutions Rating Criteria' (Aug. 16, 2010);

-- 'Rating Aerospace and Defense Companies: Sector Credit Factors' (June 10, 2010);

-- 'Rating Linkages in Parent and Nonbank Financial Subsidiary Relationships' (Dec. 30, 2009).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685

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