NEW YORK--(BUSINESS WIRE)--Fitch Ratings has published the first edition of its Defense & Security Handbook, which provides an overview of the current global defense spending environment and contains profile reports for 22 U.S. and European companies. The report also highlights the U.S. Department of Defense budget, and provides detailed spotlights on the F-35 Joint Strike Fighter program and defense contractors' pensions.
Global defense spending has stabilized, and should rise in 2017, with the global threat environment serving as a tailwind. The U.S. remains by far the largest defense market. Cash deployment actions, M&A, and pension deficits continue to pressure some defense company ratings. Program details remain essential to the analysis of specific credits.
Fitch expects the relevant parts of the addressable global defense market to rise between 3% and 5% over the next three years, which is more than Fitch's global GDP forecast. Fitch estimates this market in 2016 is approximately $400 billion-$425 billion. Fitch's defense spending estimate excludes off-limit markets, such as China and Iran. The U.S. budget accounts for 45%-50% of the addressable market by Fitch's estimates, but its growth is less than in non-U.S. markets.
Higher U.S. defense spending in fiscal year (FY) 2016 has supported Fitch's credit outlook for the defense and security sector. Investment spending turned up this year after a three-year trough, and Fitch expects continued solid spending levels in FY2017 and beyond, assuming budget caps are overridden. Although it has not yet been enacted, Fitch views the FY2017 budget request as a conservative indicator of spending trends. Fitch expects there could be upside as a result of the recent elections.
Projected U.S. spending beyond FY2017 is above enacted budget caps, so caps remain a risk through 2021. Fitch bases its defense ratings on the assumption the caps will continue to be overridden, and Fitch expects this assumption is stronger as a result of the recent U.S. elections. Fitch believes temporary continuing resolutions (CRs) for spending are still a risk, but less than in the past decade, also as a result of the elections.
The F-35 Joint Strike Fighter is the largest program in the global defense industry, and it is also one of the most international programs, with 12 customer nations and a geographically diverse supplier base. Nine countries partnered in the development of the F-35. Deliveries could almost double over the next two years, helping revenue growth throughout the defense industry.
Fitch views the defense industry as a specialized technology sector fed by significant R&D expenditures. The industry continues to pursue warfighting advantage through innovation, including cyber and third offset technologies. However, Fitch does not believe the sector is as exposed to disruption from new entrants as other industrial sectors.
Fitch sees little evidence of shareholder-focused capital allocation ebbing, and M&A activity has exceeded Fitch's expectations in 2016. Discretionary pension contributions for some U.S. defense companies could rise in the next two to three years. Capital allocation and M&A continue to nullify many of the benefits of positive defense budget trends.
Risks to the outlook include cost overruns or delays on key programs; currency fluctuations in non-U.S. markets; the impact of oil and commodity prices on government budgets; the budget cap overhang in the U.S.; additional CRs; and political disruptions. Affordability and cost reduction are also key themes in the global defense sector, and companies unable to lower costs will be at a disadvantage in program competitions.
Additional information is available on www.fitchratings.com
Fitch: US Defense Industry to Benefit from Trump Victory https://www.fitchratings.com/site/pr/1014870
U.S. Defense Spending Review Update (Upturn Supports Sector, but Budget Caps and Continuing Resolutions Risks Persist) https://www.fitchratings.com/site/re/890575
Defense Contractors' Pension Deficits on the Rise https://www.fitchratings.com/site/re/890629
Aerospace and Defense: Ratings Navigator Companion https://www.fitchratings.com/site/re/804088
Defense & Security Handbook
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001