9th Apr 2020 17:31
(Alliance News) - Moody's Investor Service on Thursday downgraded FTSE 100-listed jet engine maker Rolls-Royce Holding PLC's long-term senior unsecured rating to Baa3 from Baa2.
The credit ratings agency also cut Rolls-Royce's outlook to Negative from Stable.
Moody's said the action reflects its expectation of a "sustained period" of weaker demand for new commercial aircraft compared to recent years and previous forecasts.
The agency is also expecting "severe disruption" due to the coronavirus outbreak in 2020 due to reduced flying hours and commercial engine production
Moody's has also downgraded the rating on the company's senior unsecured euro medium term notes programme to (P)Baa3 from (P)Baa2, and downgraded the notes issued under the EMTN programme to Baa3 from Baa2.
"The aerospace and defense industry will be affected by the deep capacity cuts and financial stress for passenger airlines, leading to very significant reductions in aftermarket activity and widespread deferrals of new commercial aircraft deliveries in 2020. Airlines' damaged balance sheets are likely to soften demand for new aircraft from 2021 onwards," Moody's said.
Rolls-Royce has been most immediately affected by the coronavirus outbreak from aircraft groundings and lower flying hours, which reduce aftermarket revenues.
The International Air Transport Association predicts a 38% fall in passenger traffic in 2020 which will drive reduced flying hours in the year.
In 2019, GBP3.9 billion of the company's civil aerospace services' cash receipts were driven by flight hours of its installed engines.
In addition Moody's anticipates that Airbus SE (A2, stable) and Boeing Co (Baa1, review for downgrade) will cut aircraft production rates which will reduce Rolls-Royce's deliveries in 2020. The company's commercial aerospace revenues represented 52% of total underlying group revenues in 2019.
Moody's said: "The market for new aircraft is likely to remain weaker than 2019 for several years as a result of weak airline balance sheets and a softer economic backdrop. This will create challenges for the company to reduce losses on new engines, and to grow its aftermarket revenues through expanding the installed base of engines and flight hours per engine. A softer market is likely to drive accelerated retirements of older aircraft contributing to a weaker growth profile for the installed engine base."
Rolls-Royce continues to maintain substantial levels of liquidity, Moody's said. At April 6, the company's total liquidity amounted to GBP6.7 billion, comprising a gross cash balance of GBP5.2 billion, and a new revolving credit facility of GBP1.5 billion. The company has fully drawn its existing GBP2.5 billion bank facilities.
Shares in Roll-Royce closed 7.3% higher in London on Thursday at 349.89 pence each.
By Paul McGowan; [email protected]
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