London, 24 May 2018 -- Moody's Investors Service ("Moody's") has today downgraded to B1 from Ba3 the corporate family rating (CFR) and to B1-PD from Ba3-PD the probability of default rating (PDR) of IRKUT Corporation, JSC (Irkut), a government-related, leading military aircraft producer in Russia. The outlook has been changed to stable from negative.

The downgrade is driven by the continued deterioration in Irkut's standalone credit profile, as measured by the company's baseline credit assessment (BCA), which amplifies the company's reliance on government support for its daily operations during this heavy investment phase in MC-21 project implementation.

RATINGS RATIONALE

Today's downgrade of Irkut's rating to B1 from Ba3 was triggered by deterioration in Irkut's standalone creditworthiness (BCA) to caa1 from b3 under Moody's government-related issuer (GRI) methodology. Irkut's B1 rating continues to factor in sizeable uplift to its caa1 BCA, given Moody's assumption of the strong probability of state support in the event of financial distress.

Irkut's standalone creditworthiness has materially weakened over the last few years due to a combination of sizeable debt-funded research and development costs for a new generation civil aircraft MC-21, and reduction in high-margin export military sales. Low-margin contracts for military aircrafts with Russia's Ministry of Defense have been insufficient to support funding of the MC-21 programme without a substantial increase in new debt and leverage. Thus, the company's Moody's adjusted debt/EBITDA, net of convertible shareholder loans, elevated to 11.9x in 2016 and then became negative in 2017, while adjusted EBIT/Interest expense worsened to negative 0.6x in 2017 from positive 0.5x in 2016, on the back of a negative profitability (which factors in research and development spending as per Moody's adjustments).

Moody's expects Irkut's operating performance to remain weak over the next 12-18 months, coupled with the growing investments in the MC-21 project. Negative free cash flow generation in 2018-19 is likely to be debt funded, escalating leverage through 2019. The credit risk is partially mitigated by the strategic nature of the MC-21 project for the Russian government, which orchestrates funding support for the project via the state controlled banks and state-related entities on a regular basis.

Irkut's operating performance and, concurrently, leverage may improve after 2019, when the company expects to (1) start and ramp up commercial production and sales of the MC-21 and (2) increase share of higher-margin export revenue within its military aircraft segment.

Moody's positively acknowledge that two MC-21 aircrafts successfully completed the maiden flights proving that the programme is generally on track, with the MC-21's entry into service scheduled for 2019. However, in Moody's view, so far as tests continue, the associated execution and delay risks, both in the certification and production stages, remain high.

At the same time, Irkut's BCA positively factors in (1) strong backlog of state orders, and (2) solid cash reserves and undrawn committed facilities from the state banks. The former provides some visibility into the company's revenue, while the latter eases liquidity pressure.

As Irkut is controlled by the Russian government, the company is seen by Moody's as a government-related issuer (GRI), whose B1 ratings benefit from an uplift to the company's standalone credit quality (as measured by its caa1 base line credit assessment) driven by the strong probability of state support in the event of financial distress. In addition, Irkut is highly dependent on the Russian government for aircraft construction orders and funding, and also benefits from the government's ongoing support such as partial funding of research costs, partial reimbursement of interest expenses and regular equity injections and interest-free loans.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on Irkut's rating reflects our expectation that (1) the company's credit metrics will not weaken materially further over the next 12-18 months; and (2) liquidity will continue to be at least adequate. The stable outlook also assumes no negative change in Russia's sovereign rating and in Moody's assumption of strong government support.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on Irkut's rating is unlikely over the next 12-18 months, as the company will need to start and ramp up commercial production and sales of its MC-21 to support the recovery of its financial profile, and given that no material improvements in its military aircraft segment are envisaged through 2019.

Irkut's rating could be downgraded if (1) Russia's sovereign rating was downgraded; (2) the probability of the Russian government providing extraordinary support to Irkut diminished; (3) execution of the MC-21 project was materially delayed; (4) difficulties in obtaining external funding emerged; or (5) Irkut's financial profile deteriorated further or liquidity weakened, on a sustained basis.

PRINCIPAL METHODOLOGY

The methodologies used in these ratings were Aerospace and Defense Industry published in March 2018, and Government-Related Issuers published in August 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

COMPANY PROFILE

IRKUT Corporation, JSC (Irkut) is a leading military aircraft producer controlled by the Russian government and one of the largest companies in the Russian aviation industry. In 2017, Irkut generated revenue of approximately RUB84.5 billion.