Dépêches

Fitch Revises Boeing's Outlook to Negative; Affirms 'A+/F1' IDRs

Dépèche transmise le 30 avril 2009 par Business Wire

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Issuer Default Ratings (IDRs) and outstanding debt ratings for The Boeing Company (BA) and Boeing Capital Corporation (BCC):

--Long-term IDR at 'A+';

--Senior unsecured debt at 'A+';

--Bank facilities at 'A+';

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

Fitch has revised the Rating Outlook on all classes of debt to Negative from Stable.

The ratings cover approximately $9.3 billion of debt ($5.7 billion at BA, including approximately $380 million of non-recourse debt, and $3.6 billion at BCC). BCC's ratings are linked to BA's ratings due to the existence of a support agreement and other factors such as an operating agreement and transactional support provided to BCC by BA.

The Negative Outlook reflects Fitch's higher level of concern regarding several issues including the global recession's impact on the commercial aerospace industry, increasing pressure on Department of Defense (DoD) budgets, the potential for further delays in the 787 program, the health of the aircraft finance market, and BA's significant build-up of inventories in 2008, which significantly reduced BA's liquidity position.

Additional rating concerns include the susceptibility of the commercial aerospace industry to shocks such as terrorism and disease; the likelihood that several of BA's large defense programs will be reduced or eliminated in future DoD budgets; portfolio concentration at BCC; margin levels which are low for the rating category; periodic labor disruptions; and the performance of some programs at both Boeing Commercial Airplanes (BCA) and Integrated Defense Systems (IDS). The pension deficit and several litigation actions are also potential concerns. The outbreak of swine flu is not a key driver of the outlook revision, but it contributes to concerns about the commercial aerospace industry.

BA's debt ratings are supported by the company's balanced business portfolio (approximately 50% defense and 50% commercial), financial flexibility, competitive positions in both of its main business lines, large backlog, high levels of defense spending, and solid credit metrics. BA's liquidity position and favorable debt maturity schedule also support the ratings. Fitch believes that BA has evolved into a more diverse and lower risk company than it was at the beginning of the last aerospace down cycle that began in late 2001.

As of March 31, 2009, BA's liquidity position, excluding BCC, was approximately $6 billion, consisting of $4.5 billion in cash and investments, and complete availability under $1.5 billion of bank facilities. BCC also had $192 million of cash and $1.5 billion of bank facility availability as of the end of the first quarter. Liquidity at BA was enhanced in the first quarter with the proceeds of $1.85 billion of long-term debt issuance. While Fitch considers this liquidity position to be solid, it fell by $8.5 billion during 2008 because of significant cash usage attributable to the delays in the 787 and 747-8 programs and the machinists strike. The resulting inventory build-up drove negative $3.8 billion of free cash flow in 2008 (excluding BCC and after dividends).

Fitch estimates that BA's free cash flow in the first quarter was negative $500 million, excluding BCC. Some of the inventory build will reverse in 2009, but the bulk of the inventories will not generate cash until 787 deliveries begin, currently scheduled for 2010. BA's underfunded pension ($8.4 billion deficit compared to a surplus of $4.7 billion at the end of 2007) could affect liquidity in the medium term, but required contributions are manageable in 2009 and 2010. BA has significant financial flexibility in its ability to stop share repurchases, which totaled $7.4 billion over the past three years, but which should be minimal in 2009; share repurchases in the first quarter totaled only $50 million.

Though BA is forecasting 480-485 airplane deliveries in 2009, Fitch's ratings incorporate expectations for production cuts later in 2009 and into 2010. Fitch believes that BA could maintain its current ratings with BCA production rate reductions to levels seen in the last trough (2003/2004) assuming the company takes prompt actions to adjust its cost base to the lower production levels, as the company did starting in 2001 and 2002 during the last downturn. As a result, production cuts in addition to the recently announced 777 reductions in mid-2010 will not alone lead to additional ratings actions. Several factors are helping to support BCA's production rates in 2009: overbooking of delivery slots, deferred deliveries from 2008 due to the machinists strike (105 aircraft), and a large backlog (3,589 at the end of March).

The 787 has become an increasingly important credit issue, thus Fitch may review the ratings if there are additional material delays or problems. Fitch believes that a significant rating benefit of keeping the 787 on track will be the cash generation from inventory reduction as deliveries begin, as well as a likely decrease in R&D expense, which will aid BCA's margins. In addition, if 787 deliveries start in 2010, they will help offset possible delivery declines of other models, although reported operating margins at BCA might be diluted. First flight is now scheduled for the second quarter, and first delivery is projected for the first quarter of 2010, almost two years late. There is still risk in this program, including flight testing, certification, and delivery ramp up.

Fitch expects that BA's defense operations will continue to support the company's credit ratings, but the level of uncertainty for defense spending has increased in the past few months. The Obama Administration is having an impact on defense budgets sooner than Fitch expected. However, the Administration's initial core fiscal year (FY) 2010 defense budget recommendation ($534 billion) is 4% higher than the enacted FY2009 core budget, providing support to the industry's financial condition at least through FY2010. In early April, U.S. Secretary of Defense Gates made some recommendations for the fiscal 2010 DoD budget including program cancellations and delays. Among the large DoD contractors Boeing appears to be most at risk on the downside from Secretary Gates' comments, with several programs under pressure (Future Combat Systems, some missile defense, CSAR-X, C-17, etc.), although a few of the company's other programs (such as the F/A-18) could benefit from increased spending.

In 2008 BA's leverage (total gross debt to EBITDA), excluding BCC, was 0.6 times (x), compared with 0.5x at the end of 2007. Interest coverage in 2008 was 22.1x, compared with 25.1x in 2007. Fitch projects that BA's leverage will remain under 1.0x in 2009, including the impact of the company's proposed debt issuances. The preceding calculations exclude BCC by accounting for the subsidiary using the equity method, and non-recourse debt at BA is also excluded.

Boeing Capital:

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, aircraft and obligor concentration risks and the susceptibility of the commercial aerospace sector to exogenous shocks such as terrorist acts or disease pandemics. The Negative Rating Outlook for BCC reflects the potential adverse effects of the recession and challenging credit market conditions on commercial aircraft demand, lease rates and aircraft values.

Due to global recessionary economic conditions, Fitch believes the potential for further airline defaults or rationing of airline fleets is relatively high over the near-term. As a result, BCC's inventory of repossessed or returned aircraft is likely to increase and may pose significant challenges with respect to the sale or re-leasing of returned or repossessed aircraft. Customer concentration within the BCC's portfolio remains a concern, particularly exposure to US commercial airlines, which comprises 74% of overall portfolio exposure. BCC's top four customers, all U.S. airlines, represented nearly 50% of overall portfolio exposure at Dec. 31, 2008. Fitch notes that the top customer exposures are supported by aircraft collateral value and/or transactional support from Boeing. Therefore, Fitch expects an increase in credit-related losses and impairment charges over the near-term. However, an increase in origination volume and corresponding financing revenue will minimize the adverse impact on profitability.

In light of challenging credit market conditions, Fitch expects BCC will provide financing to support Boeing aircraft deliveries over the next two years. Fitch estimates that BCC's financing volume may range between $2 billion - $5 billion over this time.

Fitch believes BCC's funding base can support a modest increase in financing volume. Overall liquidity remains substantial. In addition to its access to BA as a funding source, BCC had $192 million in available cash balances and $6.5 billion of funding capacity at March 31 2009, which includes approximately $5 billion of funding availability under a recently filed debt shelf registration and full availability under a $1.5 billion commercial paper program. Furthermore, Fitch expects BCC to generate approximately $250 million in annual operating cashflow and an additional $500 million via portfolio amortization or aircraft sales annually. As the aircraft portfolio and corresponding debt has declined over the past five years, the company has maintained leverage at 5.0x via dividend payments to BA. In light of a potential need to borrow to meet BCC's financing activities, Fitch expects BA, if necessary, would provide capital support needed to continue to maintain leverage at that level.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.