Hexcel Corporation -- Moody's: Hexcel ratings (incl. Baa3 senior unsecured) unchanged following recent amendment; outlook remains negative

Announcement: Moody's: Hexcel ratings (incl. Baa3 senior unsecured) unchanged following recent amendment; outlook remains negativeGlobal Credit Research - 08 Feb 2021New York, February 08, 2021 -- Moody's Investors Service says the Baa3 senior unsecured ratings continue to reflect Hexcel Corporation's strong competitive standing as a leading manufacturer of advanced composite materials used in commercial aerospace, military and industrial markets. Hexcel's credit profile benefits from meaningful barriers to entry, long-term customer contracts and content on important aerospace and defense platforms.Moody's anticipates meaningful earnings headwinds from a continued destocking of inventory in the commercial aerospace supply chain in the 1H of 2021. These earnings pressures will be exacerbated by an unfavorable product mix (lower sales of higher margin carbon fiber products) and low capacity utilization rates. This will materially weigh on credit metrics, such that Moody's debt/EBITDA is likely to peak in the high single-digits by mid-2021. Thereafter, Moody's expects the benefits of cost reduction initiatives and a modest increase in narrow-body production rates, to drive gradual earnings growth and a measured improvement in credit metrics, with debt/EBITDA returning to at or below 4x by the end of 2022.During this time Moody's expects Hexcel's space & defense operations (30% of sales) to grow in the low to mid-single-digits, while industrial operations (15% sales) are expected to continue to see near-term headwinds, with growth resuming in late 2021 and beyond.Hexcel's credit risk is particularly pronounced over the next few quarters. Demand for the company's aerospace related products is in part a function of demand for commercial aircraft, which in turn is driven by air passenger volumes. Hence as an important part of the supply chain, Hexcel will continue to be exposed (indirectly) to potential disruptions from new covid variants, while delays in vaccine roll-outs could stall anticipated recoveries in air passenger volumes. This could result in incremental cuts to wide-body platforms, or a slower than expected ramp up in narrow-body aircraft, which would likely push a restoration of Hexcel's credit metrics into late-2023.The negative outlook reflects Hexcel's significant exposure to commercial aerospace markets and Moody's expectation that disruptions from the coronavirus pandemic will result in fundamentally lower production rates of wide-body and narrow-body aircraft over the next few years.The rapid spread of the coronavirus outbreak and the nascent economic recovery, which remains fragile, has created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Hexcel remains vulnerable to shifts in market demand and changing sentiment in these unprecedented operating conditions.Moody's expects continued, albeit reduced, free cash generation during the aerospace downturn and free cash flow-to-debt approaching the mid-single-digits should be achievable during 2021. External liquidity is provided by a $750 million revolver ($228 million currently drawn) that expires in June 2024. As of part of a recent amendment, Hexcel received covenant relief on its interest coverage ratio (suspended until Q4 2021) and its leverage ratio (suspended until Q2 2022) and also added a minimum liquidity requirement of $250 million.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded with a broader product offering and a greater variety of end-markets served. A more stable operating environment with increasing aerospace production rates, strong operating performance, and the maintenance of a conservative financial policy would be prerequisites to any upgrade.The ratings could be downgraded if there are additional cuts in commercial aircraft production rates or if there is a further weakening of earnings beyond what is already contemplated. Weakening liquidity or share buybacks over the next few quarters could also result in a ratings downgrade.Headquartered in Stamford, Connecticut, Hexcel Corporation is a leading advanced composites company. It develops, manufactures and markets lightweight, high performance structural materials, including carbon fibers, reinforcements for composites, pre-pregs, honeycomb, matrix systems, adhesives and composite structures used in commercial aerospace, space and defense, and industrial applications. Revenues for the twelve months ended December 2020 were approximately $1.5 billion.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. Eoin Roche VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Peter H. Abdill, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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