"European aerospace and defence companies continue to stand out among industrial corporates for their strong balance sheets, solid free cash flow generation and unfettered access to the capital markets," says Tom Chruszcz, Director in Fitch's European Industrials team. "While market conditions, particularly in the commercial aerospace segment, are likely to deteriorate further over the course of 2009, these companies are unlikely to experience difficulties funding debt requirements in the short term as it is seen as a relative safe haven by investors."
Average levels of gross cash and cash equivalents held at year-end (December) 2008 among the five companies rated publicly by Fitch - Rolls-Royce plc ('A-'(A minus)/Stable/'F2'), Thales SA ('A-'(A minus)/Stable/'F2'), European Aeronautic Defence and Space Company NV (EADS, 'BBB+'/Stable/'F2'), BAE Systems plc ('BBB+'/Stable/'F2') and Finmeccanica SpA ('BBB'/Positive/'F2') - were over EUR3bn, up from EUR2.8bn at year-end 2007. Rolls-Royce and EADS had sizeable net cash positions at year-end 2008, while BAE Systems and Thales had negligible net debt levels (net leverage of 0.1x and 0.3x, respectively). Finmeccanica's net debt position of EUR4.1bn (net leverage of 2.6x) was driven by its partly debt-funded EUR3.3bn acquisition of DRS Technologies, Inc. in Q408.
Furthermore, all five companies continued to generate positive free cash flow (FCF) in 2008, which boosted their cash positions. The average level of FCF to revenue in 2008 was 4.4%, and while this was lower than the 2007 level of 6.3% as a result of increased dividend payments and some working capital build-up, it remained at an acceptable level. Stable cash flow generation was driven by improved earnings at all companies, which resulted from favourable demand dynamics throughout most of the year as well as efficiency improvements. With the exception of Thales, which achieved an EBITDA margin of 9.6%, the same as in 2007, all the companies' EBITDA margins improved in 2008, marking a continuation of the prior year's trend.
Whilst Fitch expects market conditions in the commercial aerospace segment to deteriorate further throughout 2009, which is likely to put some pressure on companies' earnings margins and cash flow generation capabilities, the agency does not envisage a significant worsening of balance sheets or liquidity positions. Commercial aerospace backlogs remain at very high levels, and even in the event of an acceleration in order cancellations or deferrals, which is anticipated over the coming 12 - 18 months in view of the breadth of the global economic downturn, they will act as a stabilising factor.
Another source of the present credit rating stability is the companies' exposure to the defence industry. While defence budgets in most countries remain tight, the long-term and non-cyclical nature of defence contracts, as well as the low counterparty risk, means that the defence segment provides added revenue and earnings transparency. All these factors lead Fitch to believe that credit ratings are not likely to come under pressure from non company-specific events.
