NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' long-term and 'F1' short-term Issuer Default Ratings (IDRs) for The Boeing Company (BA). Fitch has also affirmed the 'A' long-term IDR for Boeing Capital Corporation (BCC). A full list of ratings is included at the end of this release.
The Rating Outlook is Stable. The ratings cover approximately $9 billion of debt ($6.6 billion attributable to BA and $2.4 billion attributable to BCC). Of the amount attributable to BCC, Fitch estimates that approximately $1.3 billion consists of debt originally issued by BCC and subsequently guaranteed by BA, with the remainder consisting of intercompany loans from BA to BCC.
KEY RATING DRIVERS
Boeing's debt ratings are supported by its competitive positions in the commercial aerospace and defense sectors, financial flexibility, liquidity position, access to capital markets, high barriers to entry in its key businesses, and large backlog ($495 billion). Debt reduction has also supported the ratings, with Boeing paying down $3.3 billion of debt over the past three years.
The ratings are also supported by the company's demonstrated ability to withstand very challenging periods such as the post-9/11 downturn, the most recent economic recession, and the 787/747-8 development delays. Boeing has also earned credit for successfully lowering its risk profile by shifting a substantial number of employees to defined contribution plans, successfully executing a significant number of aircraft production rate changes, and signing long-term labor agreements.
Rating concerns include low margin levels for the rating category; the outlook for U.S. defense spending; the aging of some of Boeing's defense programs; some remaining risks with the 787 program; the size of the company's pension deficit on a GAAP basis ($17.3 billion, but more than 100% funded on an ERISA basis); and the susceptibility of the commercial aerospace industry to shocks such as terrorism and disease. Also, the company's portfolio is less balanced than it once was, as commercial growth has reduced defense revenues to approximately one-third of consolidated revenues.
The Stable Outlook reflects Boeing's financial flexibility, liquidity, and backlog. A Positive Outlook could be driven by continued improvement in Boeing's credit profile from higher commercial aircraft deliveries, further progress on 787 program risk retirement, and U.S. defense spending stabilization. Several initiatives to boost margins, if successful, also could drive positive rating actions.
However, more aggressive cash deployment to shareholders, defense spending uncertainty, and the need to bring down 787 costs make an outlook change unwarranted at this time. Fitch's expectations for debt reduction and pension contributions over the next few years have been lowered as a result of BA's focus on share repurchases ($6 billion in 2014 and a new $12 billion authorization in place) and dividend increases (up 88% in the past two years). Although BA's performance in 2014 generally exceeded Fitch's expectations, the allocation of cash toward shareholder actions at the expense of debt reduction could slow the improvement in BA's credit profile.
At the end of the first quarter of 2015, Boeing had a consolidated liquidity position of approximately $14.6 billion. This consisted of $9.6 billion in cash and investments and complete availability under $5 billion of bank facilities. Free cash flow (cash from operations less capital expenditures and dividends) was $4.5 billion in 2014, and Fitch expects FCF will be flat to down modestly in 2015 as a result of higher capex and dividends. BA's leverage (Debt/EBITDA) in 2014 was just under 1.0x, and Fitch expects this will improve to approximately 0.9x in 2015. Core leverage, excluding debt attributable to BCC, was approximately 0.7x in 2014.
Boeing Commercial Airplanes (BCA)
The Large Commercial Aircraft (LCA) market is in the middle of a strong upturn which will drive higher revenues and cash generation at Boeing Commercial Airplanes (BCA). A large order book, overbooked delivery slots, new airplane model deliveries, delivery acceleration requests, and geographic diversity are elements of this outlook. Since 2010 BCA's revenues have nearly doubled and unit deliveries increased 56% as the company executed 10 production rate changes. Fitch believes support for higher production rates persists because of the large backlog and strong orders in 2014 (1,432 aircraft net of cancellations). BCA's focus over the next two years will be executing the deliveries of the large backlog, lowering 787 costs, and completing the development of several derivative aircraft models.
BCA's backlog continues to grow, reaching 5,715 aircraft worth approximately $435 billion at the end of March. The backlog is at record levels and represents approximately seven and a half years of production at estimated 2015 production rates, although this coverage varies greatly by program. BCA delivered 723 aircraft in 2014, and Fitch projects Boeing will deliver 755 aircraft in 2015 and 765 in 2016.
Fitch expects new aircraft demand will remain strong despite lower fuel prices, with the positive impact on GDP and airline traffic trumping the reduced advantage of fuel-efficient new aircraft. Fitch views the fall in oil prices as mostly supply driven. Demand and valuations of older aircraft could benefit, but new aircraft will be needed to meet continued traffic growth. Also, airlines generally make aircraft purchase decisions based on conservative, long-term price forecasts, not short-term movements. Airlines also like the built-in hedging value of newer, fuel-efficient aircraft. New aircraft also provide benefits to airlines beyond lower fuel costs, including lower maintenance costs, fleet commonality and lower emissions.
The 787 program remains a key driver of Boeing's growth and competitive position, and it has been a sizeable start-up business within the Boeing enterprise, growing to a Fitch-estimated $12 billion to $13 billion of revenues in about four years. Fitch believes the bulk of the risks have been retired, and Boeing has estimated the program will begin contributing positive cash flow later in 2015.
Concerns remain about the program's profitability and large inventory level, which reached $40.6 billion at the end of March. The inventory included $26.9 billion of deferred production costs accumulated through the use of program accounting. Deferred production per aircraft has been gradually declining. While many risks have been retired, the program is still developing in some areas including the plan to raise production to 12/month from 10/month in late 2016, the launch of the 787-10, and need to stabilize parts of the supply chain.
While BCA is Boeing's highest profile segment, the defense segment (BDS) provides some balance, which strengthens BA's overall credit profile. With $31 billion in revenues and $3.1 billion in operating profits, BDS accounted for approximately one-third of BA's consolidated revenues and operating profits in 2014. The fiscal 2015 U.S. defense budget likely hit a trough (base budget and wartime spending), and it should begin rising in fiscal 2016, even under the scenario in which the Sequester is not overridden. However, Fitch still considers the spending outlook uncertain, including within the different elements of the overall defense budget and the risk of future government shut-downs.
Fitch considers BDS' portfolio to be of mixed quality, with some solid and growing programs offset by a group of aging programs, including the F-15, F-18, and the C-17. Fitch believes these older programs need to be replaced with new opportunities to avoid restructuring actions at BDS later this decade. There are several upcoming program competitions that would help BA maintain its leading position in the U.S. defense sector. The most important of these is the Long Range Strike Bomber, which could be awarded this summer. International defense sales (37% of BDS' $60 billion backlog) could also help maintain BA's overall defense position.
Fitch believes that BCC is a core subsidiary of BA and therefore equalizes its ratings, reflecting its role arranging, structuring, and providing financing to assist in the sale of BA's products. The ratings are also supported by the high level of management and operational integration between the two entities, as well as BA's track record of support for BCC, reflecting the fungibility of funding between the two entities.
In addition, BA has provided a full and unconditional guarantee for the due and punctual payment and performance of all of BCC's outstanding publicly-issued debt. Fitch views the parent guarantee as the strongest form of parental support, which further confirms the rating linkages between the parent and subsidiary. Still, BCC's ratings also reflect its sound operating performance, stable asset quality, sufficient liquidity profile and manageable leverage on a standalone basis.
BCC's operating performance is consistent with the company's operating strategy and focuses on minimizing the use of its own balance sheet in support of BA aircraft sales. Revenues have trended down in recent years due to a smaller portfolio, run-offs and aircraft sales; however, the company has remained solidly profitable. Asset quality has remained relatively stable over the years, as the company worked through a number of credit issues within its portfolio and exposed itself to less risk as a result of the decrease in customer financing. Fitch believes that loss reserves, direct BA support, and current sector conditions provide sufficient support relative to potential losses on receivables.
Fitch's key assumptions within the rating case for Boeing include:
--Large commercial aircraft deliveries of 755 in 2015 and 765 in 2016;
--Substantial share repurchases and dividend increases;
--Refinancing of all debt maturities;
--Suspension of share repurchases in the event of liquidity pressures or an industry shock;
--Modest increase in margins in 2015;
--Flat defense revenues in 2015 and 2016.
Positive rating actions could be driven by an improvement in Boeing's credit profile from higher commercial aircraft deliveries, debt reduction, and pension contributions. Boeing's margins are low for the rating category, so several initiatives to boost margins, if successful, also could drive positive rating actions. Modifying the cash deployment strategy to have less focus on share repurchases could also lead to positive ratings actions.
There could be a negative rating action if there are material negative developments with the 787 program or other aircraft programs leading to delivery delays, order cancellations, large additional costs, or inventory write-downs. Large acquisitions, although not anticipated, also could negatively affect the ratings, as could debt funded share repurchases. Sustained consolidated FFO adjusted leverage approaching 2.0x could lead to a negative action.
BCC's ratings and Rating Outlook are linked to those of its parent. Positive rating actions would be limited by Fitch's view of BA's credit profile, thus Fitch cannot envisage a scenario where the captive would be rated higher than its parent. Conversely, negative rating actions could result from a change in BA's ratings or from a change in the perceived relationship between BCC and BA, including the early termination of the parent guarantee prior to the repayment of BCC's outstanding publicly issued debt.
Fitch has affirmed BA and BCC's ratings as follows:
--Long-term IDR at 'A';
--Senior unsecured debt at 'A';
--Bank facilities at 'A';
--Short-term IDR at 'F1';
--Commercial paper programs at 'F1'.
Boeing Capital Corporation:
--Long-term IDR at 'A;
--Senior unsecured notes at 'A'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'2015 Outlook: Global Aerospace and Defense' (Dec. 17, 2014);
--'The Boeing Company - Ratings Navigator' (Dec. 8, 2014);
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);
--'Global Non-bank Financial Institutions Rating Criteria' (April 28, 2015).
Applicable Criteria and Related Research:
2015 Outlook: Global Aerospace and Defense (Traffic and Order Backlogs Trump Fuel)
Boeing Company (The) - Ratings Navigator
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Global Non-Bank Financial Institutions Rating Criteria -- Amended