After discussions for about a year, the Brazilian government announced
yesterday that it has approved the strategic partnership between Boeing
Co. (A/Stable/A-1) and Embraer S.A., in which Boeing will acquire 80% of
Embraer's commercial aviation division that will turn into a joint
venture (JV) between the two companies.
If the transaction is completed as proposed, Embraer's business will be
narrowed to its executive jet and defense units, which have lower margins
and higher volatility than the commercial aviation division. But Embraer
will retain a 20% stake in a JV with stronger growth prospects,
benefiting from Boeing's expertise and commercial capabilities.
Therefore, despite the significant improvement in Embraer's balance
position, with a post-transaction net cash position of $2.5 billion, we
believe that the spin-off will considerably weaken the company's business
risk profile and credit quality.
All the existing bonds of the company's financial arms, Embraer Overseas
Limited and Embraer Netherlands Finance BV, will migrate to the new JV,
while final terms and conditions on the bonds are not yet defined.
On Jan. 11, 2019, S&P Global Ratings placed its 'BBB' global scale issuer
credit rating on Embraer on CreditWatch with negative implications,
mainly reflecting the potential weakening of its business risk profile.
We have also placed our issue-level ratings on CreditWatch developing,
because the ratings will depend on final terms and conditions that could
vary, and depending on the strength of the link between the JV and
Boeing's credit profile.
We expect to resolve the CreditWatch listing once the remaining approvals
occur and we have more detailed information on the JV's credit profile.
SAO PAULO (S&P Global Ratings) Jan. 11, 2019—S&P Global Ratings took the
rating actions described above. The CreditWatch placement follows the consent
from the Brazilian government, due to its golden share ownership of Embraer,
to the deal between Embraer and Boeing. Embraer will spin off its commercial
aviation business into a new entity (commercial aviation JV) and sell a
controlling stake of 80% in it to Boeing. The enterprise value of the JV was
set at $5.26 billion, and the net cash proceeds (after tax and separation
costs) that Embraer will receive is about $3.1 billion. Embraer will also
retain a put option for its 20% stake in the JV and will benefit from annual
The companies will also establish a separate JV, which Embraer will control,
for the KC-390 program in the defense unit, aiming to increase global sales of this aircraft model. This JV, along other support agreements, could generate synergies of about $50 million per year to Embraer, including equipment procurement.
Although the transaction will bolster Embraer's leverage metrics and generate
an annual dividend stream from the JV, we view potential downside impact to
Embraer's credit quality in more than one notch because the spin-off will
considerably weaken the company's business risk profile. This is mainly due to a smaller scale and rise in client concentration at its defense division, in addition to higher earnings volatility and the need to improve profitability of its executive jet division. Currently, we estimate that EBITDA margin of Embraer's executive jet division is close to 5%, compared with 15% at the commercial aviation division.