Fitch gives Investment Grade rating to Brazil’s Embraer
Fitch Ratings has issued a statement on Brazilian airline Embraer issuing a BBB- foreign and local currency long-term issuer default ratings (IDR), which still keeps the company in investment grade. The same ‘BBB-’ grade has been issued to unsecured ratings to debts issued. Fitch has also assigned a ‘AAA(bra)’ national scale rating to Embraer with its rating outlook “stable”.
Fitch’s rating measures approximately $3.5 billion of debt outstanding as of 31 December last year.
The ratings agency said that Embraer’s ratings reflected its “competitive positions in the commercial and business jet markets; large backlog ($22.5 billion) covering several years of sales; consistent profitability; several promising defence programs; and the current favourable environment in the global commercial aviation industry”.
Its solid liquidity profile, mostly held outside Brazil, and its large export revenues combined with some offshore operating cash flow further support the ‘BBB-‘ ratings.
Rating concerns include significant competition in both the commercial and business jet markets; ongoing heavy investment and risks of potential delays related to new aircraft programs; new entrants into the commercial jet market; low operating margins in several business segments; and significant exposure to BNDES, as it finances more than 40% of Embraer’s aircraft sales.
Some of Embraer’s credit metrics based on gross debt are weak for the ratings, but this weakness is offset by solid metrics on net debt basis, as well as the company’s liquidity position.
Off-balance sheet contingent obligations, mostly related to the weak market for regional jets with 50 or fewer seats, are also a concern to Ffitch, however, this is mitigated by guarantee deposits partly collateralising this exposure. The continuing Securities and Exchange (SEC) and Department of Justice (DOJ) investigation into potential violations of the foreign corrupt practices act that Embraer is embroiled in is also incorporated into Fitch’s analysis.
Brazil’s economic and political environment is also a concern and affects the rating, because the majority of Embraer’s operating asset base is locally domiciled and Brazilian government spending has a potential impact on Embraer’s defence and security business.
However, Fitch stated that it believes that Embraer is partly insulated from its domestic environment because the bulk of its commercial markets are global. Approximately 88% of the company’s revenue is generated from exports or from business operations based outside Brazil.
Fitch considers that Embraer’s ratings could be at least one notch higher than Brazil’s country ceiling if the country ceiling were downgraded.
Brazil’s country ceiling is currently ‘BBB-‘. This means a potential downgrade of Brazil’s IDR (‘BB+’/Negative Outlook) and a lowering of the country ceiling would not necessarily trigger a downgrade of Embraer’s ratings.