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DJMN: PRESS RELEASE: Moody's Changes Boeing's Rating Outlook To Negative; Affirms A2 L-T Rating
The following is a press release from Moody's Investors Service:
Approximately $10.1 billion of debt affected
New York, October 14, 2009 -- Moody's Investors Service affirmed the A2
long term and P-1 short term debt ratings of The Boeing Company
("Boeing") and its supported subsidiary, Boeing Capital Corporation
('Boeing Capital"), but changed the rating outlook to negative from
stable.
"A series of negative developments have had the cumulative effect of
weakening Boeing's financial flexibility at the A2 level, and led to the
revision in the rating outlook to negative", noted Bob Jankowitz at
Moody's Investors Service. Boeing is expected to continue to provide
broad support to its market as needed, including customer financing,
supplier management and investment in product development/customer
support.
However, this market support will begin to erode its stability in the A2
rating category, particularly if negative trends at Boeing continue or
end demand weakness results in significant production cuts.
BOEING'S A2 LONG TERM DEBT RATING
Support for Boeing's A2 debt rating comes from its position as one of the
two large commercial airplane makers with a commercial backlog of about
$250 billion, as well as being one of the largest US defense contractors
with mission critical aircraft and systems that generate predictable
profits and cash flow. Liquidity is strong with sufficient resources to
manage through the downcycle, and credit metrics are mostly within the
range of other single-A issuers although at the lower end at this time.
Boeing has meaningful long term potential from its B787 program, with
gross revenue we estimate to be over $100 billion from existing orders
alone. Airplane financing appears to be available at this time,
alleviating a major concern of earlier in the year. The US Ex-Im Bank is
expected to play an increasing role in airplane financing going forward,
which could limit the need for Boeing Capital to provide customer
financing.
NEGATIVE DEVELOPMENTS
The series of set-backs that have weakened financial flexibility are
mostly specific to Boeing, starting with the cash burn during the lengthy
machinist strike through continued B787 program delays.
Commercial airplane customers, airlines and leasing companies mostly,
continue to be strained as well. Although it appears deterioration of
passenger traffic and freight volumes have reached the inflection point
and likely to turn up somewhat over the coming year, continued weakness
in the business fundamentals of airlines could prompt Boeing (and Airbus)
to institute production cuts.
Depending on how Boeing manages a reduction, if one is deemed needed, the
likelihood of lower earnings and cash flow in relation to already higher
debt levels could cause credit metrics to move below levels that are
consistent with the A2 debt rating.
We estimate that a 20% cut in production could lower operating profits by
around $1 billion per year. Boeing nearly doubled its corporate debt this
year as outflows associated with the acquisition of certain B787 related
businesses from Vought, the pay out under a guaranty and the ramp-up of
inventory levels consumed cash.
The most recent negative news for Boeing surrounding a delay in the new
747-800 program was particularly disappointing. That airplane uses a
familiar airframe with traditional materials and tested suppliers and
facilities, so delays suggest continued stress in the company's new
aircraft development processes that could undermine its image with
airline customers.
Also, probable changes in the Department of Defense's ("DoD") procurement
policies could pressure Boeing's profits. Boeing's defense focus is on
long term aircraft and aerospace systems while the DoD is shifting
acquisition priorities to become more focused on achieving flexibility
with field equipment. This suggests that Boeing could be among the
hardest hit prime contractors.
Pension could also become a significant funding issue. While Boeing faces
limited required pension funding in 2009 and 2010, beginning in 2011,
required funding of over $1 billion per year will place a significant
call on cash resources.
BOEING CAPITAL CORPORATION
Boeing Capital's outlook was also changed to negative from stable,
reflecting the captive nature of the firm's business and its reliance on
support from Boeing as a ratings driver. Under a support agreement,
Boeing commits to maintain at least 51% ownership in Boeing Capital, and
agrees to ensure that Boeing Capital's net worth and fixed charge
coverage ratios meet minimum levels. Absent Boeing's support, Boeing
Capital would be rated lower than the assigned A2.
RATING SENSITIVITY
The rating could be lowered if: i) weakness in the passenger or air
freight markets result in accelerated deferrals or cancellation of orders
sufficient to require a production cut in the range of 15-20% off of
anticipated 2009 deliveries, particularly if Boeing is unable to reduce
costs sufficiently during the wind down to preserve metrics of EBIT to
Interest of at least 5x and retained cash flow to debt of at least 25%
(after Moody's standard adjustments); ii) Boeing is unable to sustain an
operating margin of at least 7.5% over the near term or does not show
progress towards a sustainable upper single-digit operating margin over
time, particularly if the margin is affected by customer reimbursements
or other costs associated with the B787 and B747 delays; iii) cash
pension contributions exceed $1 billion per year and expected to do so
for some time, or Boeing Capital's cumulative new volume over the next
several years is expected to exceed $4 billion or, iv) Boeing is unable
to manage the supply chain during the ramp-up of its B787 delivery
schedule such that delivery rates slip materially from current
expectations.
The outlook could be stabilized if: i) commercial airplane production
continues in line with Boeing expectations of around 475 airplanes; ii)
no further material delays develop with the B787 or B747; iii) Integrated
Defense Systems is able to sustain its operating margin at around the 10%
level while keeping revenue declines from DoD budget pressures to less
than 5% per year; iv) Boeing makes progress towards credit metrics
consistent with the rating level with debt/EBITDA of around 2x, retained
cash flow to debt exceeding 30% and strong return on capital measured as
EBITA to Average Assets at least at the 10% level.
Outlook Actions:
..Issuer: Boeing Company (The)
....Outlook, Changed To Negative From Stable
..Issuer: McDonnell Douglas Corporation
....Outlook, Changed To Negative From Stable
...Issuer: Boeing Capital Corporation
....Outlook, Changed to Negative From Stable
The last rating action on Boeing was the assignment of an A2 rating to
the company's senior unsecured notes on July 29, 2009, and for Boeing
Capital was an upgrade of ratings to A2/Prime-1 (in connection with an
upgrade of the Boeing ratings) on March 15, 2006. The principal
methodology used in rating Boeing was Moody's Aerospace and Defense
Rating Methodology, published in January, 2007 and in rating Boeing
Capital was Analyzing the Credit Risks of Finance Companies, published in
October 2000 and available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other methodologies and
factors that may have been considered in the process of rating this
issuer can also be found in the Rating Methodologies sub-directory on
Moody's website.
The Boeing Company, based in Chicago, Illinois, is a manufacturer of
large commercial airplanes and also one the largest prime US defense
contractors.
CREDIT RATINGS ARE MIS'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF
ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MIS DEFINES CREDIT
RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL
OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF
DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED
TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS ARE
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ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MIS ISSUES ITS
CREDIT RATINGS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL
MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION
FOR PURCHASE, HOLDING, OR SALE.
Copyright 2009, Moody's Investors Service, Inc. and/or its licensors and
affiliates including Moody's Assurance Company, Inc. (together, "MOODY'S").
All rights reserved.
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provided "as is" without warranty of any kind and MOODY'S, in particular,
makes no representation or warranty, express or implied, as to the accuracy,
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otherwise) or other circumstance or contingency within or outside the control
(MORE TO FOLLOW) Dow Jones Newswires
October 14, 2009 12:34 ET (16:34 GMT)
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