Fitch Ratings has downgraded Airbus Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'A-'/ The Outlook is Negative. Fitch has also downgraded Airbus's and Airbus Group Finance BV's senior unsecured debt to 'BBB+' from 'A-'. Airbus's Short-Term IDR has been affirmed at 'F1'.
The downgrade reflects Fitch's view that the recovery from the pandemic will be more prolonged relative to our previous expectations, with a slower rebound in the large commercial aircraft (LCA) market leading to weaker cash flows through the medium term. Fitch believes that Airbus will be challenged to return its financial metrics to levels consistent with a 'A-' rating by the end of 2022.
The Negative Outlook reflects Fitch's view that key financial ratios may come under further pressure in the short to medium term as a result of the uncertain nature, length and impact of the pandemic on the sector and the global economy, which has traditionally been an important driver of airline traffic.
Fitch expects Airbus's 2020 deliveries to be between 500-550 units, the lowest level since 2011. In subsequent years, Fitch expects annual deliveries to increase at a low double-digits percentage rate, driven primarily by the A320 family, although this base case assumes no repeat of the widespread restrictions on flights experienced in 2Q20 as well as the containment of COVID-19 via a widely available vaccine in 2021. Fitch notes the Airbus backlog remains very strong at over 7,400 units, although Fitch does not expect 2019 aircraft delivery rates to be reached until at least 2025.
As a consequence of the sudden decline in deliveries, Airbus's funds from operations (FFO) margin is likely to be in the low single digits in 2020, and is expected to rise from 2021 to around 7%-9%, a level considered moderate for a 'BBB+' rating. Some margin upside is likely to be derived from the company's restructuring plan to reduce the current headcount, although the benefits of these measures may not be fully achieved until the latter part of 2021.
Free cash flow (FCF) is expected to be volatile over the short term, driven primarily by working capital swings. In 2020, Fitch expects the company to experience a working capital outflow of around €6bn, the impact of the effort to support its supply chain and manage the production decline, which will leave it with a considerable amount of completed but undelivered aircraft at year-end. As the majority of these aircraft are delivered over 2021, FCF is expected to turn significantly positive. In subsequent years, Fitch expects FCF to become more stable, as production is likely to mirror deliveries, and remain sustainably positive again.
Fitch expects global airline traffic will not return to 2019 baseline levels until 2024, with the pace of recovery diverging across regions
Airbus has taken significant measures in 2020 to strengthen its already considerable liquidity, including the issuance of over €6.6 billion of new bonds, expanding its revolving credit facility to €6 billion from €3 billion and setting up a two-year supplementary liquidity line, which at end-3Q20 remained undrawn with a limit of €6.3 billion.
However, the new bonds have led to a material increase in gross debt to over €16 billion at end-3Q20 from €8.6 billion at end-2019, which coupled with the reduced earnings expected in the short to medium term, will lead to gross leverage levels considered high for the 'A' category. While Fitch expects Airbus to regain and use its considerable debt repayment capacity in the short term, it is possible that gross debt will remain elevated relative to historical levels for the next few years.