(The following statement was released by the rating agency) Overview
-- EADS has shown a sustained strong financial performance, including solid free cash flow and very moderate dividends.
-- We now view EADS' liquidity position as "exceptional" and are therefore raising the short-term rating to 'A-1', according to our criteria.
-- At this stage, we consider it too early to make rating decisions on the proposed merger of EADS with BAE Systems.
-- The positive outlook reflects the possibility that we may raise the ratings if EADS can manage the project risk on A350XWB while maintaining its "modest" financial risk profile, including exceptional liquidity over the next 12 months.
Rating Action On Oct. 2, 2012, Standard & Poor's Ratings Services raised its short-term corporate credit rating on The Netherlands-based European Aeronautic Defence and Space Co. N.V.
(EADS) to 'A-1' from 'A-2'. At the same time, we affirmed our 'A-' long-term corporate credit rating on the group. The outlook remains positive.
The uplift of the short-term rating reflects our criteria, which stipulates that an issuer with a 'A-' long-term rating and a liquidity position that we classify as "exceptional" is assigned an 'A-1' short-term rating.
The affirmation of the long-term rating reflects our classification of EADS' financial risk profile as "modest" and business risk profile as "strong". A key support for the rating is EADS' position as one of the two global producers of large commercial aircraft, the competitive product portfolio across its businesses, and its conservative financial policy. The ratings also take into account the cyclicality of the commercial airplane industry, development risks for new aircraft, and the company's complex governance structure. Execution risk related to the group's restructuring programs is somewhat moderated by the successful track record of recent years.
For the first half of 2012, EADS reported a sales increase of 14%. EBIT before one-off items was EUR1.4 billion, about double that of the prior year. The increase in reported EBIT (before one-time items) followed higher volumes and better pricing at Airbus, stronger business levels at the Eurocopter division, and a better earnings contribution from Astrium. This was offset by higher research expenses and the continually negative weight on earnings from the A380 and A350XWB aircraft programs. Airbus delivered 279 commercial aircraft versus 258 in the first half of 2011. As of June 30, 2012, the order backlog at Airbus Commercial comprised about 4,400 aircraft. Total order backlog for the group was EUR552 billon, providing visibility for more than 10 years.
For 2012, we have incorporated in our base case a high single-digit percentage increase in sales. In our view, this would mainly stem from a likely increase in the number of deliveries of commercial aircraft to about 570-580 units. EBIT (before one-time items) should show a disproportionate increase compared with our sales forecast. We incorporated an operating profit (EBIT before one-offs) of about EUR2.7 billion in our base case, supported by higher volumes, better pricing, and improved earnings from the A380 program.
EADS' foreign exchange hedge rate in 2012 should improve minimally relative to 2011. We therefore don't anticipate a meaningful impact on operating profit in 2012 from foreign exchange effects. The key risks to our forecast are unexpected charges or cost-overruns relating to the A350XWB commercial aircraft program.
EADS' credit protection measures are strong for the ratings. On Dec. 31, 2011, available cash and cash equivalents were EUR16.8 billion. This amount, adjusted for cash needs for ongoing operations (EUR2.5 billion) exceeded fully adjusted gross debt by EUR3.7 billion. Hence, fully adjusted debt was negative. Our base-case projection for EADS in 2012 is a positive free operating cash flow (FOCF) of about EUR1.0 billion-EUR1.5 billion. This compares with a FOCF after customer financing and before acquisitions of EUR2.5 billion in 2011.
Given the moderate dividend payment for 2011 (EUR0.4 billion), we expect discretionary cash flow (FOCF less dividend) in 2012 to be meaningfully positive. We believe EADS will continue to report an excess of available and unrestricted cash over debt in 2012. We also expect fully adjusted debt to stay negative in 2013 unless significant cash charges of more than EUR4.0 billion-EUR5.0 billion were to materialize for major projects, such as the A350XWB.
The key risk remains the successful completion of the A350XWB wide-body aircraft project. Airbus has on hand an order book of more than 500 aircraft for the A350XWB. We continue to view the timetable for the A350XWB as challenging. Technical and operational risks can lead to program delays. We think that EADS' strong credit metrics today include a buffer to accommodate conceivable cash charges for the A350XWB project if this project were to face difficulties. Therefore, improved visibility on the success of the A350XWB would support a potential rating uplift, as it would mitigate or remove a key risk to the financial risk profile. A rating upgrade is likewise tied to the continuation of EADS' track record of maintaining a conservative financial policy.
On Sept. 12, 2012, U.K.-headquartered defense contractor BAE Systems PLC (BBB+/Stable/A-2) and EADS announced that they are in discussions regarding a possible combination of their businesses. At this stage it's too early to make any rating decisions given the nature of the discussions and the lack of a final decision to proceed or not. Even if the companies decide to pursue the merger, we anticipate that the negotiations will be lengthy and involve multiple stakeholders. If successful, it could then take a significant time to acquire the necessary regulatory approvals and come to an arrangement satisfactory for the governments involved. For further details see: "BAE Systems And EADS Ratings Could Change If Business Combination Discussions Crystallize," published Sept. 13, 2012.
Government-related entity (GRE) assessment In application of our criteria for government-related entities (GREs), we continue to view EADS as being of "limited importance" to its 15% owner, the Republic of France (unsolicited ratings AA+/Negative/A-1+) and the 5.5% owner the Kingdom of Spain (BBB+/Negative/A-2). We likewise view the link between EADS and the government as being "limited". As a result, and in line with our criteria, we assess the likelihood of extraordinary government support as being "low". Consequently, we make no rating uplift to the stand-alone credit profile (SACP) of 'a-'.
The short-term rating is 'A-1' and we categorize EADS' liquidity position as "exceptional," as defined in our criteria. Our assessment is based on the company's sizable cash balances and good availability under committed credit facilities.
As of June 30, 2012, EADS had substantial cash, cash equivalents, and current securities totaling EUR8.3 billion. Liquidity is likewise supported by a noncurrent securities portfolio of EUR6.7 billion, which mainly consists of liquid assets and securities that could be quickly turned into cash.
Of the total on-balance-sheet liquidity, we view EUR2.5 billion as cash required for ongoing operations.
Existing cash and cash equivalents safely cover short-term maturities of EUR1.7 billion as of June 30, 2012. These short-term maturities are primarily with joint ventures. EADS' short-term maturities in 2013 are very minimal, both absolute and relative to existing financial flexibility. The next larger maturity is a EUR1.0 billion bond due in 2016.
In April 2011, EADS refinanced its undrawn revolving credit facility (RCF). A new EUR3.0 billion RCF is due in April 2017 and has a one-year extension option available to the borrower. To our knowledge, this facility has no financial covenants or material adverse change clauses. We expect EADS' discretionary cash flow (FOCF less the EUR370 million of dividends) to be positive in 2012 and therefore not to influence its financial flexibility.
The positive outlook reflects the potential for an upgrade in the next 12 months, in line with our criteria, based on the prospects for EADS' operating performance. We have an outlook horizon of 12 months because we revised the outlook to positive in September 2011.
The positive outlook is supported by the group's order backlog and our anticipation that EADS' credit measures will remain at the higher end of our "modest" category. The financial risk profile is likewise supported by our belief that EADS will continue a very conservative financial policy.
We believe that improved visibility on the success of the A350XWB would support a potential upgrade by mitigating or removing a key risk to the company's financial risk profile. An upgrade would also depend on EADS continuing its conservative financial policy, thereby refraining from potentially larger acquisitions and shareholder remuneration. Under our base-case scenario, EADS will likely continue to report an excess of available and unrestricted cash over debt in 2012 and 2013, supported by continued free cash flow generation and very low dividend payments. We consider a positive rating change unlikely as long as the merger discussions with BAE Systems continue and are not finalized.
We could revise the outlook to stable if EADS carried out very sizable acquisitions, or unexpectedly engaged in considerable shareholder remuneration either through dividends or share buybacks. We could also revise the outlook to stable if risks related to projects such as the A350XWB led to substantial cash-effective charges
The rating on EADS could also change if the recently announced combination of the business with BAE Systems were to materialize. If the merger goes ahead, we would view downward pressure on the EADS rating as limited. This is because the combined entity of BAE and EADS is likely to have a business risk profile in the "strong" category, while at the same time displaying a financial risk profile that is likely to be in the "modest" category. We could, however, revise the outlook to stable subsequent to a completion of the merger with BAE (for further details see "BAE Systems And EADS Ratings Could Change If Business Combination Discussions Crystallize," published Sept. 13, 2012).
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
Ratings List Ratings Affirmed; Upgraded To From
European Aeronautic Defence and Space Co. N.V.
Corporate Credit Rating A-/Positive/A-1 A-/Positive/A-2 Senior Unsecured A- A- EADS Finance B.V. Senior Unsecured* A- A- Commercial Paper* A-1 A-2
*European Aeronautic Defence and Space Co. N.V.
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at
. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)