Fitch Ratings-New York/Chicago-21 February 2018: Fitch Ratings has assigned 'A' long-term ratings to The Boeing Company's (BA) proposed issuance of $1.4 billion of senior unsecured notes. The notes will be issued in four parts, with maturities of 2023, 2028, 2038, and 2048. Proceeds will be used for general corporate purposes, but Fitch believes this issuance could be considered a refinancing of debt maturing later in this year. At the end of 2017 BA's consolidated debt included $1.3 billion of short-term debt and current maturities of long-term debt.
The Rating Outlook is Stable. The ratings cover approximately $11.1 billion of debt ($8.6 billion attributable to BA and $2.5 billion attributable to Boeing Capital Corporation), up from approximately $10 billion at the end of 2016. Of the amount attributable to Boeing Capital (BCC), Fitch estimates less than $1 billion consists of debt originally issued by BCC and subsequently guaranteed by BA, with the remainder consisting of intercompany loans from BA to Boeing Capital. BA ended 2017 in a net debt position for the first time in six years, and Fitch expects debt levels will rise again in 2018.
KEY RATING DRIVERS
BA's ratings reflect its competitive positions in the commercial aerospace and defense sectors, high barriers to entry in its key businesses, liquidity position, cash generation, and large backlog ($488 billion). The ratings are also supported by the company's demonstrated ability to withstand challenging periods such as the post-9/11 downturn, the most recent economic recession, and the 787/747-8 development delays.
BA has earned credit for lowering its risk profile by shifting a substantial number of employees to defined contribution benefit plans, signing long-term labor agreements, and successfully executing a significant number of aircraft production rate changes over the past several years.
Concerns include low margin levels for the rating category; the aging of some of Boeing's defense programs; some remaining uncertainty about the ultimate profitability of the 787 program; the potential for delays and cost overruns on development programs; regular and substantial charges; the size of the company's pension deficit on a GAAP basis ($16.4 billion); pricing trends for some aircraft models; 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 less than one-third of consolidated revenues. The intense competitiveness of the commercial airplane industry is also a rating consideration.
Increasingly aggressive cash deployment to shareholders is not currently a threat to the rating, as it has generally been funded from operating cash flow. However, it has slowed the improvement in BA's credit profile. BA's focus on share repurchases and dividend increases is coming at the expense of debt reductions and cash pension contributions. BA repurchased $9.2 billion of shares in 2017, and its board recently approved a new $18 billion repurchase program, as well as a 20% dividend increase.
Credit risks from potential M&A activity are rising as a result of potential strategic transactions, as illustrated by the ongoing discussions with Embraer S.A. (BBB-/Stable). Acquisitions could also result from BA's goals of growing services revenues and increasing the degree of vertical integration in targeted areas. These M&A risks are mitigated by BA's substantial cash generation, sizable liquidity position, and some debt capacity at the current rating. The ratings impact of M&A transactions would be driven by how the acquisitions were funded and the degree to which BA curtailed share repurchases.
Fitch expects large commercial aircraft (LCA) deliveries from BA and Airbus SE to rise to approximately 1,600 units in 2018 (up 7%) and 1,725 units in 2019 (up 8%). Bombardier and Embraer are likely to deliver a further 200 commercial aircraft in 2018. Fitch believes industry deliveries could peak in 2019, and a key question will be whether deliveries growth will be sustained, flatten or start a modest decline after 2019. The combined order books at Airbus and Boeing totalled more than 13,000 aircraft at the end of 2017, equivalent to approximately eight years of deliveries at projected 2018 rates. Fitch estimates the value of the backlog at more than $900 billion. The backlog serves as a significant downside cushion to aviation sector stress. Other key indicators of aircraft demand, such as global airline traffic, remain positive.
In the second half of 2017 BA established a third business segment called Boeing Global Services (BGS), targeting a substantial long-term increase in both commercial and defense services revenues. Fitch considers this a significant strategic initiative, and it could materially affect financial results, cash deployment, and program decisions over the intermediate term.
As of Dec. 31, 2017, Boeing had a strong consolidated liquidity position of approximately $14.4 billion. This consisted of $10 billion in cash and investments, and $5.0 billion of revolving credit facility availability, reduced by $600 million of commercial paper. Consolidated debt at the end of December was $11.1 billion of which $1.3 billion is classified as short-term. During 2017, the company refinanced approximately $900 million in debt. Boeing's FCF (cash from operations, less capex and dividends) was $8.2 billion in 2017, up significantly from $5.1 billion in 2016. Fitch expects FCF to rise modestly in 2018 despite a sizable increase in dividends and capital expenditures, as cash from operations continues to grow as a result of higher aircraft deliveries and productivity.
At Dec. 31, 2017 BA's leverage (debt/EBITDA) was 0.9x, down minimally from approximately 1.0x at the end of 2016. Total debt has increased over $2 billion since the end of 2014 ($9.1 billion at year-end 2014 to $11.1 billion as of 2017). Fitch expects steady leverage in 2018 as higher debt levels are offset by higher profitability. Fitch estimates core leverage (excluding debt attributable to BCC) was 0.7x for 2017 and 2016, and 0.6x in 2015.
In most cases where an industrial company has a captive finance subsidiary Fitch deconsolidates the subsidiary and then evaluates the parent's financial statements treating the subsidiary as an equity investment. In the case of BA, Fitch does not follow this process but instead looks at financial metrics primarily on a consolidated basis.
Fitch looks at BA and BCC on a consolidated basis for several reasons. First, BCC has evolved into a less significant part of BA's financials as a result of the successful strategic shift to reduce BCC's emphasis on portfolio growth and increase its focus on facilitating third-party financing for its customers. BCC's primary strategic mission is not regular lending to BA's customers, but only occasionally financing aircraft, with approximately 99% of BA's deliveries typically financed by third parties.
In addition, the financial information Fitch has about BCC is not as detailed as is typically the case with industrial finance captives. In early 2013 BA fully guaranteed all of BCC's outstanding debt, which is also not typical of the industrial finance captives rated by Fitch. In general, Fitch views consolidating BCC's financial statements to be a more conservative approach to the credit analysis of BA than if the firm were to deconsolidate BCC.
Boeing's most immediate peer is Airbus (A-/Stable). Despite some convergence in credit profiles over the past several years, several key credit factors still differentiate the two companies' ratings. Cash flow generation is one of the key differentiators between Airbus and Boeing. Boeing has consistently achieved better FCF and FFO over the past decade, due to better program execution and lower investment needs despite higher dividend payouts. Cash generation should continue to grow at both companies, but Boeing's cash flow advantage is likely to persist. Boeing's business profile is also modestly stronger than Airbus' because of a more diverse revenue mix between commercial and defense. Both companies have strong balance sheets and liquidity positions, with Airbus generally operating with a higher net cash position than Boeing.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
--Large commercial aircraft deliveries of 815-820 aircraft in 2018 and approximately 890 in 2019;
--Commercial aircraft revenue in 2018 increases due to higher deliveries, and a slight increase in defense, space and security revenues;
--EBITDA Margins in 2018 will rise 25 bps;
--Debt rises as debt issuance exceeds debt maturities;
--Substantial share repurchases and dividend increases;
--Share repurchases will be suspended in the event of liquidity pressures or an industry shock.
Developments That May, Individually or Collectively, Lead to Positive Rating Action
Positive rating actions could be driven by an improvement in BA's credit profile from higher commercial aircraft deliveries, debt reduction and pension contributions. BA's margins are low for the rating category, so several initiatives to boost margins, if successful, could also drive positive rating actions. Modifying the cash deployment strategy to have less focus on share repurchases could also lead to positive rating actions.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
There could be a negative rating action if there are material negative developments with any of the company's major programs leading to delivery delays, order cancellations, large additional costs or inventory write-downs. Large acquisitions, although not anticipated, also could 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 early termination of the parent guarantee prior to the repayment of BCC's outstanding publicly issued debt.
As of Dec. 31, 2017, Boeing had a strong consolidated liquidity position of approximately $14.4 billion consisting of $10 billion in cash and investments, and $5.0 billion of revolving credit facility availability, reduced by $600 million of commercial paper borrowings. Consolidated debt at the end of December was $11.1 billion of which $1.3 billion is classified as short-term. During 2017, the company issued $2.1 billion in debt, and repaid $1 billion. Approximately $2.5 billion of the company's outstanding debt was attributable to BCC at the end of 2017.
FULL LIST OF RATING ACTIONS
Fitch currently rates BA and BCC as follows:
--Long-term IDR 'A';
--Senior unsecured debt 'A';
--Bank facilities 'A';
--Short-term IDR 'F1';
--Commercial paper programs 'F1'.
Boeing Capital Corporation
--Long-term IDR 'A;
--Senior unsecured notes 'A'.