Rating Action: Moody's downgrades ratings for Spirit AeroSystems (CFR to B2); outlook negative
Global Credit Research - 21 Jul 2020
New York, July 21, 2020 -- Moody's Investors Service ("Moody's") downgraded its ratings for Spirit AeroSystems, Inc. ("Spirit"), including the company's corporate family rating (CFR, to B2 from Ba3) and probability of default rating (to B2-PD from Ba3-PD), and the senior unsecured debt ratings (to Caa1 from B1). Moody's also downgraded the ratings on the company's senior secured notes (to Ba2 from Baa3) and senior secured second lien notes (to B1 from Ba2). The company's SGL-3 speculative grade liquidity rating remains unchanged. The ratings outlook is negative.
The downgrades primarily reflect Moody's expectation that disruptions in the aftermath of the coronavirus pandemic will result in fundamentally lower 737 MAX production rates well into 2023. The MAX is a critical program to Spirit and has historically accounted for about 50% of revenues and a higher portion of earnings. The reduced production rates will lead to a meaningful weakening of cash generation and key credit metrics through at least 2023.
The spread of the coronavirus pandemic, the weakened global economy and outlook, low oil prices and asset price declines are sustaining a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The passenger airline industry is one of the sectors most significantly affected by the shock given its exposure to travel restrictions and sensitivity to consumer demand and sentiment. With demand for new passenger aircraft intricately linked to demand for air travel, deliveries of new aircraft, including Boeing's 737 MAX, will be materially lower than pre-coronavirus plans. Moody's regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety.
The negative outlook incorporates Moody's expectation of fundamentally lower production rates for the majority of Spirit's commercial aerospace platforms over the next few years. This will result in meaningful revenue and earnings pressure and an across-the-board weakening of debt protection measures.
The B2 corporate family rating broadly reflects Spirit's considerable scale as a strategically important supplier in the aerostructures market, as well as the company's strong competitive standing supported by its life-of-program production agreements and long-term requirements contracts on key Boeing and Airbus platforms. These considerations are tempered by a high degree of platform and customer concentration, and associated financial and operational risk relating to both the MAX production halt and the coronavirus crisis, with particular acuteness of adverse impact in the first half of 2020 and a slow recovery thereafter.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A ratings upgrade could be prompted by a material recovery in Boeing 737 MAX production rates to at least 30 per month, leading to the consumption of the inventory of such fuselages that Spirit has stored on Boeing's behalf. An improved liquidity profile characterized by expectations of consistent positive free cash generation, substantial cash balances that are not earmarked for acquisitions and/or absorption during the recovery period, and near-full availability on the revolving credit facility could also warrant consideration of a prospective ratings upgrade. Expectations of more steady and predictable operating performance, more broadly, and less volatile earnings and cash flows, would also be prerequisites for any ratings upgrade.
Factors that could lead to a ratings downgrade include additional reductions in the MAX production rate, or if the MAX grounding continues into 2021. Unanticipated cancellations or deferrals of MAX orders by airline customers beyond what is already contemplated, or an expectation of further weakening in the earnings and/or cash flows of Spirit, could also result in downward ratings pressure. Failure to maintain a healthy level of unused availability under the committed bank revolving credit facility or an anticipated breach of financial covenants could result in downward ratings action.
The following is a summary of today's rating actions:
Issuer: Spirit Aerosystems, Inc.
Corporate Family Rating, Downgraded to B2 from Ba3
Probability of Default Rating, Downgraded to B2-PD from Ba3-PD
Senior Secured Regular Bond/Debenture, Downgraded to Ba2 (LGD2) from Baa3 (LGD2)
Senior Secured Second Lien Regular Bond/Debenture, Downgraded to B1 (LGD3) from Ba2 (LGD3)
Senior Unsecured Regular Bond/Debenture, Downgraded to Caa1 (LGD5) from B1 (LGD5)
Outlook, remains Negative
Headquartered in Wichita, Kansas, Spirit AeroSystems, Inc., is a subsidiary of publicly traded (NYSE: SPR) Spirit AeroSystems Holdings, Inc. The company designs and manufacturers aerostructures for commercial aircraft. Components include fuselages, pylons, struts, nacelles, thrust reversers and wing assemblies, principally for Boeing but also for Airbus and others. Revenues for the last twelve months ended March 31, 2020 were approximately $7 billion.
The principal methodology used in these ratings was Aerospace and Defense Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1224306. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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.
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Eoin Roche Vice President - Senior Analyst 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 Russell Solomon Associate Managing Director 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. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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