Fitch Ratings announced that the 2010 credit outlook for its rated EMEA aerospace and defence companies remains stable.
Negative factors such as continually weak commercial end-markets and pressure on defence budgets in developed countries will be offset by companies’ relatively strong financial profiles, chiefly exemplified by their good liquidity positions. Possible rating actions in 2010 are likely to be event-driven — e.g. acquisitions — or by company-specific factors such as issues relating to key programmes.
The majority of A&D companies rated by Fitch have strong liquidity positions and financial flexibility, both of which will help the industry withstand the expected weak global economy in 2010. At end-H109, the top five EMEA A&D companies rated by Fitch had cash and equivalents totalling approximately €18.1bn. Short term debt and debt maturities for these companies totalled approximately €5.7bn at end-H109, and total debt outstanding was about €18.6bn. All of the companies have committed, long-term credit lines, with no credit lines expiring in the next 18 months. Fitch expects EMEA A&D companies to follow conservative cash deployment strategies in 2010 to maintain liquidity.
Nevertheless, Fitch expects earnings margins and cash generation capability to be pressured in 2010 by weak commercial markets — as well as tighter defence spending in core markets. While the sector has historically been able to generate relatively strong levels of free cash flow (FCF), Fitch believes that cash generation will be materially lower in 2010.
Fitch’s near-term outlook for the commercial aerospace industry is weak because of the vulnerable economic environment and concerns about financing. While the backlogs at major commercial aircraft manufacturers Airbus (100%-owned by European Aeronautic Defence and Space Company NV (EADS, rated ‘BBB+/F2’/ Stable)) and The Boeing Co (‘A+/F1’/Negative) are large by historical standards, poor airline profitability and weak passenger growth may lead to a rise in deferrals and cancellations and thus pressure on production rates in H210. Key risks for the sector include the global economy, aircraft finance, exogenous shocks (terrorism, disease pandemic, etc.), and execution of new programmes. A general risk is that production rates have not been revised downward materially despite the weakening economy, and several segments are at or near historical delivery peaks.
“Companies exposed to the commercial aerospace sector will continue to suffer from the effects of the global recession and weak airline profitability,” says Tom Chruszcz, Director in Fitch’s EMEA Industrials team.
“However, Fitch believes that deterioration in credit profiles in 2010 will be relatively minor given the offsetting low cyclicality of the defence segments and the strength of the five large A&D companies in Fitch’s rating universe.”
A report on the global 2010 A&D industry outlook will be available on the agency’s website at www.fitchratings.com in January 2010.