Fitch Rating's long-term 'A' and 'F-1' short-term Issuer Default Ratings (IDRs) for The Boeing Company (BA) are not affected by BA's new guarantee of Boeing Capital Corporation's (BCC) outstanding public debt. A full list of ratings is included at the end of this release. The Rating Outlook is Stable. The ratings cover approximately $10.5 billion of debt ($7.9 billion at BA and $2.6 billion at BCC).
Earlier today BA announced that BCC will suspend its separate reporting obligations with the U.S. Securities and Exchange Commission (SEC), and BCC will no longer file reports with the SEC as of the first quarter of 2013. BA also announced the termination of its existing support agreement with BCC and the establishment of a guarantee of BCC's outstanding public debt. Fitch does not believe these changes, including the debt guarantee, materially affect BA's consolidated credit profile and ratings, as discussed below.
Boeing Capital De-Registration and Strategic Shift
A main rationale for de-registering BCC is to reduce costs and improve efficiency by eliminating the burden of filing a full set of documents with the SEC.
In addition, Fitch believes the changes reflect BCC's successful strategic shift which began in late 2003 to reduce its emphasis on portfolio growth and increase its focus on facilitating third-party financing for its customers.
This strategic shift can be seen in BCC's financial profile over the past ten years. Since the end of 2002 BCC's assets (net of cash) have declined from approximately $12 billion to $4 billion and debt has gone from $9.5 billion to $2.6 billion. BCC has not required net capital contributions from BA since 2003, and BCC has paid more than $2.5 billion in dividends to BA in the past nine years. As of the end of September, BCC's assets net of cash accounted for only 5% of BA's consolidated assets. BCC financed none of BA's commercial airplane deliveries in the first nine months of 2012, although it looks like there were three leases in the fourth quarter.
Credit Impact of Boeing's Guarantee of BCC's Debt
For several reasons, BA's guarantee of BCC's outstanding public debt is not a material credit issue. The first reason is the steady reduction in BCC's size and its strategic shift away from portfolio growth.
In addition, the substance of the BA-BCC relationship and the level of risk residing with BA will change only modestly. Consistent with Fitch's ratings linkages criteria, BCC's ratings have been linked with BA's ratings as a result of factors such as the support agreement, close operational ties, and shared credit facilities (under which BCC's borrowings would have been guaranteed by BA). Importantly, BA also provides $1.5 billion (at Sept. 30, 2012) of asset guarantees covering $1.86 billion of BCC's portfolio, mostly 717 aircraft. Because of these factors, BA has been responsible for much of the risk at BCC, and this will change only modestly because of the full guarantee of BCC's debt.
Finally, BCC's portfolio quality has improved over the last year because investment grade-rated Southwest Airlines purchased BCC's largest customer, AirTran, and subsequently guaranteed AirTran's leases with BCC. Southwest, AirTran, and BCC also reached an agreement with Delta Airlines to sublease 88 of AirTran's 717s, of which 78 are categorized as leases in BCC's portfolio (representing 30% of BCC's portfolio). This sublease agreement matches AirTran's current leases, and then extends for seven additional years.
Fitch previously focused its credit analysis on BA's financial results which excluded BCC by accounting for it as an equity investment. Because BA will now guarantee BCC's outstanding public debt, going forward Fitch's analysis will focus on consolidated financial results, augmented with some credit metrics using 'core debt' related to the company's manufacturing operations. This 'core debt' approach takes into account the different business profiles of BA's manufacturing operations and financial operations.
What Could Trigger a Rating Action
Fitch recently affirmed the ratings for BA and BCC. Please see the press release 'Fitch Affirms Boeing's Ratings at 'A/F1'; Outlook Stable' dated Jan. 17, 2013.
There could be a negative rating action if the current issues with the 787 program are not resolved in a timely manner or if the problems result in material negative developments with the 787 program leading to delivery delays, order cancellations, large additional costs, or inventory write-downs. Large acquisitions, although not anticipated, could also negatively affect the ratings, as could a shift in the cash deployment strategy away from debt reduction. Given the risks with the 787 program, a positive rating action is not likely in 2013.
Fitch rates BA and BCC as follows:
--Long-term IDR at 'A';
--Senior unsecured debt at 'A';
--Bank facilities at 'A';
--Short-term IDR at 'F1';
--Commercial paper programs at 'F1'.
Additional information is available at 'www.fitchratings.com'
Applicable criteria and related research
--'2013 Outlook: Global Aerospace and Defense' (Dec. 21, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
2013 Outlook: Global Aerospace and Defense
Corporate Rating Methodology
Craig Fraser, +1-212-908-0310
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