Frankfurt am Main, April 09, 2020 -- Moody's Investors Service, ("Moody's") has today affirmed Airbus SE's senior unsecured and short term issuer ratings at A2 and P-1 respectively. Concurrently Moody's has affirmed Airbus SE's senior unsecured MTN rating at (P)A2 as well as Airbus Finance B.V.'s backed senior unsecured rating at A2, its backed senior unsecured MTN rating at (P)A2 and its backed Commercial Paper rating at P-1. The outlook on both entities has been changed to negative from stable.
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The commercial aviation sector has been one of the sectors most significantly affected by the shock given its exposure to declining passenger traffic, travel restrictions and sensitivity to consumer demand and sentiment. More specifically, the weaknesses in Airbus' credit profile, including its exposure to most airline customers across the world have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Airbus remains vulnerable to the outbreak continuing to spread. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Airbus of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.
The rating affirmation balances Airbus' very strong balance sheet and liquidity position prior to the coronavirus outbreak against the severity of the demand shock from the outbreak.
Airbus closed year-end 2019 with a very strong balance sheet position. Supported by strong demand for its narrow body aircrafts family (the so called A320 family) and progress on ramping up its production volumes across this franchise, Airbus' gross leverage as measured by Moody's adjusted Debt/EBITDA stood at 1.8 at year-end 2019 (2.2x in 2018). Net leverage was 0.7x (net cash position of €5.3 billion if adjusted for approximately €11 billion of long term fixed income securities that Airbus held on balance sheet at 31st December 2019). This provides good cushion against the current market shock.
Airbus' balance sheet and liquidity strength will be required to navigate through the current demand shock. The very sharp decline in passenger traffic since the outbreak of coronavirus and the delivery delays caused by closed borders and travel restrictions will result in a significant decline in deliveries in 2020 and to sizeable negative free cash flow in 2020.
Negative FCF, however, can be accommodated by Airbus' very strong liquidity position. The company had approximately €30 billion of available liquidity as per 31st March 2020 after the payment of the fine and the buyout of Bombardier's minority share in a joint venture as well as usual seasonal working capital build up.
Moody's base case assumptions are that the coronavirus pandemic will lead to a period of severe cuts in passenger traffic and deliveries of aircraft over at least the next three months with all regions affected globally. Our base case assumes there is a gradual recovery in deliveries starting in the third quarter. However there are high risks of more challenging downside scenarios and the severity and duration of the pandemic and travel restrictions is uncertain. Moody's analysis assumes an around 40% reduction in Airbus' deliveries in 2020. Airbus just announced a reduction of the pre-coronavirus average rates of roughly one third and production will align with deliveries in line with IATA's forecast of a 38% decline in revenue passenger kilometers for 2020. Longer term we do not envisage a return to 2019 delivery numbers before year-end 2022. Under this scenario we expect Airbus' leverage as measured by Moody's adjusted Debt/EBITDA to significantly exceed our downgrade trigger at year-end 2020 before reverting back to the lower end of the our tolerance level for the current rating by year-end 2022.
Airbus has announced production rate cuts ranging from 30% for single aisle aircrafts to 55% for wide bodies in order to protect its liquidity position and balance sheet during this period of subdued demand. The production cut will significantly reduce Airbus' cash burn from lower deliveries as around three quarters of the current cash burn is related to procurement costs. Moody's estimates that Airbus has a relatively low fixed / variable cost structure with around 25%/75% notwithstanding that Airbus needs to be very mindful of the health of the supply chain when cutting production rates. Airbus also announced that it will implement a mechanism of partial unemployment schemes if needed, which will help further reducing fixed costs particularly in France and Germany, while at the same time will put in place a short-term cash containment plan. Our leverage forecast for 2020 implies a material negative Moody's defined free cash flow for the full year 2020 assuming that production rates are aligned with deliveries throughout 2020. We expect FCF to turn positive again in 2021 in connection with a slow recovery.
More broadly Airbus' A2 senior unsecured rating reflects its large scale and strong market position as one of two global commercial aircraft producers, as well as its leading position in the European Defence and Space market. Airbus' credit quality also benefits from the long-term revenue visibility afforded by its record-high commercial aircraft order book of 7,482 aircraft as of December 2019, equivalent to around nine years of production, based on 2019 deliveries.
Airbus' A2 rating continues to incorporate one notch of uplift from the company's a3 standalone Baseline Credit Assessment (BCA), given the strategic ownership stake of France (11%) and Germany (via a subsidiary of Kreditanstalt für Wiederaufbau - KfW, 11%), in accordance with our Government-Related Issuers (GRI) rating methodology.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook on the current rating reflects the uncertainties related to the length of the current outbreak and the recovery pattern of demand for aircrafts post outbreak.
Moody's base case assumes a very sharp drop in deliveries in Q2 2020 with a gradual recovery starting from Q3 2020 but full year 2020 deliveries to be 40% below 2019 levels. For 2021 and 2022, Moody's expects deliveries to reach 2017 and 2019 levels respectively. These assumptions are subject to material uncertainties notwithstanding that Airbus' sizeable order backlog and overbookings will act as a buffer if underlying demand for aircrafts picks more slowly than we currently expect. The supportive stance of governments around the world to protect their airlines as an important element of their transportation infrastructure also offers some comfort on recovery prospects for the industry. The lessor community could also play a role in supporting deliveries and PDP payments at a time when the financial flexibility of airlines is strained. Lastly, an ageing fleet should support some level of aircraft demand post outbreak.
We have also only assumed a mild drop in aircraft prices post outbreak, a working assumption that might be tested to the downside if demand for aircraft is slow to recover and Boeing finally resumes its 737 MAX production.
LIQUIDITY
Airbus' liquidity position is deemed very strong. The company had approximately €26 billion of available liquidity sources at 31st December 2019 including €22.5 billion of cash and long term securities on balance sheet. Its revolving credit facility and available credit lines stood at €18 billion during Q1 2020 leading to €30 billion of total available liquidity per 31st March 2020 even after the payment of the fine and the buyout of Bombardier's minority share in a joint venture as well as usual seasonal working capital build up. Airbus' long term securities are largely eligible as collateral for the repo facilities of the ECB. Airbus could use its wholly owned bank to get access to immediate liquidity by offering its long term securities as collateral to the ECB. Liquidity is also supported by the decision to withdraw the 2019 dividend proposal and the top-up pension contribution for 2020.
Airbus has recently accessed the bond market to issue €2.5 billion of bonds. The placement was more than 4x oversubscribed demonstrating Airbus' strong access to long term debt capital markets.
We expect Airbus' quarterly cash burn to peak in Q2 2020 on the basis of our assumption that passenger traffic starts recovering in Q3 2020 leading to a recovery in deliveries. We expect a cash burn of around €10 billion in Q2 2020 with a full year 2020 negative free cash flow of €8 billion. Under such a scenario Airbus would have sufficient liquidity available. Our current working assumption is that Airbus will not require government support throughout the outbreak although we deem it reasonably likely that the issuer would be supported in case of need in light of the current market context.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Positive rating pressure is unlikely in the short term. Longer term an operating margin in at least the high-single digits, a gross leverage as measured by Moody's-adjusted debt/EBITDA below 2.5x and retained cash flow (RCF)/net debt of 40% or higher as well as the maintenance of excellent liquidity and meaningfully positive FCF generation could lead to positive rating pressure.
Negative rating pressure would build if leverage (Moody's-adjusted debt/EBITDA) would increase sustainably above 3.0x, especially if not sufficiently balanced by cash on balance sheet. Impaired customer demand and difficulties to ramp up production post the receding of the coronavirus outbreak leading to a permanent deterioration in Airbus' balance sheet as illustrated by a material increase in gross debt and / or a weakened liquidity profile could also lead to negative rating pressure.
LIST OF AFFECTED RATINGS:
..Issuer: Airbus Finance B.V.
Affirmations:
....BACKED Commercial Paper, Affirmed P-1
....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)A2
....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed A2
Outlook Actions:
....Outlook, Changed To Negative From Stable
..Issuer: Airbus SE
Affirmations:
.... LT Issuer Rating, Affirmed P-1
....Senior Unsecured Medium-Term Note Program, Affirmed (P)A2
....Senior Unsecured Regular Bond/Debenture, Affirmed A2
Outlook Actions:
....Outlook, Changed To Negative From Stable