WARSAW - -- Fitch Ratings has downgraded Airbus SE's 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 an '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.
Key Rating Drivers
-- Long-Term Shift in Industry:
The pandemic has had a profound effect on demand for commercial aircraft. 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.
-- Cash Flow Weakness:
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 EUR6 billion, 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.
-- Airline Traffic Recovery Slow:
Fitch expects global airline traffic will not return to 2019 baseline levels until 2024, with the pace of recovery diverging across regions. We assume 2021 traffic will be down more than 30% from the 2019 baseline in our base case, but this assumes progress is made in controlling the pandemic.
Consequently, airline profitability and fleet expansion capabilities will be materially lower than pre-pandemic. We assume that domestic/regional traffic recovers more quickly, reaching 2019 levels by mid-2023, while international/long-haul traffic will not return to 2019 levels until 2024 at the earliest.
-- Well Diversified Business:
Airbus has a strong business profile, underpinned by its leading positions in high-tech sectors with high barriers to entry such as large commercial aircraft and helicopters, a well-diversified product range and end-customer base and significant presence in the defence and space markets, which provide long-term growth prospects and lower volatility of demand than commercial aerospace.
-- Debt Issuance Supports Liquidity:
Airbus has taken significant measures in 2020 to strengthen its already considerable liquidity, including the issuance of over EUR6.6 billion of new bonds, expanding its revolving credit facility to EUR6 billion from EUR3 billion and setting up a two-year supplementary liquidity line, which at end-3Q20 remained undrawn with a limit of EUR6.3 billion.
However, the new bonds have led to a material increase in gross debt to over EUR16 billion at end-3Q20 from EUR8.6 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.
-- No-Deal Brexit Risks Manageable:
Fitch believes that Airbus is adequately prepared in the event that the Brexit transition period ends on 31 December 2020 with no agreement. The company's production activities are unlikely to be immediately disturbed given the measures undertaken including increasing levels of inventory and reducing reliance on the traditional border crossings through the use of its own aircraft and airfields.
Nevertheless, there are some risks relating to the preparedness of its supply chain to watch in the short term.
-- ESG Influence:
Airbus has faced various investigations by government agencies, which resulted in the company paying a total of EUR3.6 billion in fines in 2020.
This has had a negative impact on its credit profile, and is relevant to the rating in conjunction with other ESG factors as it reflects potential reputational damage.
Airbus has an ESG relevance score of '4' for Management and Strategy.
Airbus has a direct peer in The Boeing Company (BBB-/Negative). Until recently, both companies exhibited strong capital structures for their rating category, although that of Boeing has deteriorated materially in 2020. Leverage, gross and net, which is lower at Airbus and has been fairly stable in recent years, was historically not a key differentiating factor between the two or a significant rating driver but has taken on a more prominent role this year. Likewise, liquidity remains robust at Airbus but is less so at Boeing at present. High cash and cash-equivalent balances have been a regular feature of Airbus' capital structures.
Historically, the largest differentiating factor was FCF, which for a number of years until 2019 was consistently higher at Boeing, owing chiefly to its previously better programme implementation and lower investment needs, and despite higher dividend pay-outs. Over the past two years, Boeing's cash flows have been weak, chiefly as a result of the grounding of the B737MAX, and are expected to recover to historical levels only in the medium term.
Boeing also has a slightly better business profile than Airbus, largely as a consequence of its more diverse revenue split between commercial and defence activities. Both companies are equally strong in size, market position and geographic and customer diversification. Airbus has a stronger presence in the commercial single-aisle aircraft segment, which is likely to recover quicker from the pandemic than the wide-body segment, where Boeing has been traditionally dominant in the twin-aisle segment, which has let it achieve comparatively higher profitability levels before 2019.
No Country Ceiling, parent/subsidiary or operating environment aspects impact the ratings.
-- A decline in large commercial aircraft deliveries in 2020 of at least 35% compared with 2019, followed by double-digit increases in 2021 and 2022, almost exclusively in the single-aisle aircraft
-- An FFO margin of around 2%-3% in 2020 stemming from lower production and deliveries of aircraft, followed by a recovery in the margin from 2021 as deliveries increase and Airbus benefits from the adjustment of its cost base undertaken in 2020
--Large (between EUR5 billion - EUR6 billion) working capital outflow in 2020 as Airbus retains a large number of undelivered completed aircraft at year-end as part of its effort to maintain the stability of its supply chain; inventory levels are expected to gradually normalise over 2021
-- A reduction in capex over the short to medium term of over 10% s Airbus adjusts to a lower output environment
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years.
The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance.