Moody's Investors Service, (Moody's) placed its debt ratings, including the A3 senior unsecured ratings, for Boeing and subsidiary Boeing Capital Corporation on review for downgrade. Moody's affirmed the Prime-2 short-term rating.
"Recent developments suggest a more costly and protracted recovery for Boeing to restore confidence with its various market constituents, and an ensuing period of heightened operational and financial risk, even if certification of the MAX comes relatively near-term, as expected," said Jonathan Root, Moody's Senior Vice President and lead analyst for the company.
Key supplier, Spirit AeroSystems' announcement on January 10 that it will lay-off a significant part of its MAX workforce was unexpected and is an example of the ongoing event risk weighing on the credit profile. The recent news covering Boeing employee e-mails that include exchanges regarding the importance of having the 737 MAX be similar enough to its predecessor, the 737 NG, to avoid a regulatory requirement of simulator training brings to the forefront the judicial, legislative and regulatory risk that has existed since the grounding began last March. These risks have been mostly in the background while the focus has been on the process for the MAX to return to service. Moody's considers that the longer the grounding runs, the greater the risk to Boeing's already blemished reputation with broadening governance and social considerations related thereto, which could have a more lasting impact on the company's future business.
Moody's review will consider 1) the timing for which the US Federal Aviation Administration and other aviation authorities will allow the 737 MAX to return to service; 2) how a now likely requirement for all MAX pilots to complete simulator training will affect the timing for the parked fleet of about 387 aircraft to return to service; 3) how soon after the MAX's approval by aviation authorities will Boeing begin delivering aircraft from the built inventory of 400 some-odd MAXes, and the aggregate number of months to deplete the built inventory, 4) when will Boeing re-start assembly of MAXes and at what projected monthly rates; 5) the across the supply chain effects of the suspension of assembly on its ability to produce at whatever monthly rates Boeing seeks when the system re-starts; 6) how Spirit AeroSystems' January 10 lay-off announcement will affect Boeing's plans for providing financial support to the base of suppliers; and 7) the additional separate charges to the 737 program and for additional compensation to customers that Boeing will likely report when it announces Q4 earnings on January 29th. Plans to bolster its near-term liquidity, including decisions regarding its cash dividend, which has so far been maintained, will also be a consideration of the review.
Each of the above items will influence the extent of the company's near-term reliance on external funding, its future earnings and cash flows and the time needed to restore its financial profile to pre-grounding levels following the aircraft's return to service and the restoration of the production system.
The longer the grounding runs into 2020, the higher customers' claims for compensation, as well as other costs, will climb. The longer the supply chain is idled, the greater the risk to a timely restoration of the ensuing desired monthly production rates. The increasing program costs that will be accrued and realized pro-rata with future deliveries, along with anticipated increases in compensation claims by airlines, will lower the 737 program margins and cash generation for years to come.
The A3 senior unsecured rating broadly reflects Boeing's position as one of two manufacturers of large commercial airplanes and a prime US defense contractor. The diversification of the defense and services businesses helps mitigate increasing financial and operational risk within the company's commercial aircraft operations. The A3 rating also considers that the recent flurry of news could indicate that meaningful progress towards the completion of a more comprehensive review of the aircraft's design and manufacture has been made, rather than a narrow review of the flight control software and hardware, with relatively modest findings of problems. Also, the expanding scope of 737 MAX news reports could indicate that a thaw in the company's relationship with the FAA is occurring following the departure of former CEO, Dennis Muilenburg on December 23rd.
Prior to initiating the review, Moody's had indicated that a downgrade of the ratings could occur if the grounding was to run into the second-half of 2020, particularly if aviation authorities identify some other component of the MAX's flight management system that requires updating. Assuming the MAX is re-certified, other factors that could lead to a downgrade include the re-start of share repurchases, significant cancellations of MAX orders, or mis-steps in key aircraft or defense programs that require significant charges. Expectations of sustaining unrestricted cash net of issued commercial paper below $4 billion, retained cash flow to net debt below 25%, EBIT to interest expense below 6x, EBITA to average assets below 8%, and/or debt to EBITDA above 2.5x were also cited as potential downgrade drivers.
Phoenix reports “robust” 2019 business growth
Phoenix American Financial Services and its wholly owned subsidiary PAFS Ireland (collectively “Phoenix”) has announced robust business and operational growth for 2019 building on a decades-long industry leading role as provider of managing agent services for asset-backed securitizations (ABS) in the commercial aviation and aircraft engine leasing industry. P
In 2019, Phoenix concluded managing agent contracts with Stratos Aircraft Management for the JOL Air Limited ABS, Merx Aviation for the MAPS 2019-1 ABS, BOC Aviation, Ireland for the Silver 2019-1 ABS, Carlyle Aviation Partners for the AASET 2019-1 ABS and Dubai Aerospace Enterprise for the Falcon 2019-1 ABS. With these additions, Phoenix now services entities with over 1,400 aircraft and engines having a combined initial appraised value exceeding $35 billion at original issuance.
Phoenix attributes its dominance of the aircraft ABS managing agent space to an uncompromising insistence on excellence in every aspect of its service offering. The Company employs Oracle Financials for its general ledger accounting, adheres to robust processes, procedures and controls as evidenced by obtaining a clean opinion for its ISAE 3402, Type I audit for PAFS Ireland and cultivates a long-tenured work force to maintain deep levels of operational experience. “ABS issuers give careful consideration to the managing agent for their securitizations,” said Joseph Horgan, Senior Vice President at Phoenix. “Top tier technology, time tested experience and responsive service are what issuers look for in a managing agent and that’s what we deliver at Phoenix.”
John McInerney, having served Phoenix in various roles for over ten years, was elevated to Managing Director of PAFS Ireland late in 2018. In 2019, McInerney and the team in Shannon continued to build on the success story that is PAFS Ireland by winning and servicing new contracts while managing an overall staff increase of 13 percent to ensure the business continues to go from strength to strength. “Long employee commitment and promotion from within are values considered essential to Phoenix for long-term high-quality performance” said McInerney.