Moody’s has joined fellow rating agencies Fitch and Standard & Poors in cutting British Airways debt to ‘junk’ status.
In early April, as we covered, Fitch cut the credit rating of British Airways plc from BBB- to BB+. Whilst there was no press announcement, the IAG website here shows that S&P cut the debt of British Airways plc to BB – also ‘junk’ – on 20th May.
(For clarity, this downgrade is specifically for British Airways and not for its parent, International Consolidated Airlines Group. This is because the debt which has been downgraded is ringfenced against the British Airways operation.)
You can see a summary of Fitch’s reasoning from early April here.
Moody’s has now followed. Having S&P and Moody’s downgrade its debt is a headache for British Airways, because many investment funds are not allowed to hold debt which is rated as junk by two or more ratings agencies.
Moody’s has cut its BA rating from Baa3 to (ironically) Ba1. The outlook is ‘negative’, meaning that the next move is more likely to be downwards than back up to investment grade.
A detailed summary of the Moody’s report on British Airways is here but you will need to register with the Moody’s website to read it. Here are some key extracts:
The rating was driven by, in their view:
The increasing duration and severity of the coronavirus outbreak
Moody’s expectation that the airline industry will remain deeply constrained in 2020 and 2021 and will not recover 2019 passenger volumes until 2023 at the earliest
Despite current substantial liquidity, risks that financial resources could be under pressure from further coronavirus outbreaks and extended restrictions on air travel
The likelihood that the company will incur substantially increased debt during the coronavirus pandemic, and faces challenges to recover its balance sheet in the next two to three years
The company’s strong market position, high profitability, strategic importance to the United Kingdom economy and expectation of its continuing industry leadership
The company said:
“Moody’s expects flight activity to resume over Q3 and Q4 of 2020, but remaining severely depressed, with domestic flights recovering earlier and a slower return for international and long haul flights. With around 80% of capacity outside Europe and a high exposure to business travel and premium leisure, Moody’s expects that as flights resume British Airways will see a slower recovery profile than the industry as a whole. The United Kingdom’s current plans to quarantine international air passengers arriving from outside Ireland are also likely to affect British Airways’ ability to resume meaningful volumes in 2020.”
and (bolding mine):
“The company also has substantial levels of unencumbered aircraft fleet and has the potential to monetise its air miles loyalty scheme which could be used to further enhance liquidity. Moody’s estimates that the company has liquidity to support around one year of groundings before additional funds are raised, although this remains subject to some uncertainty particularly in relation to the level of potential customer refunds for cancelled flights.”
“IAG has hedged around 90% of its expected fuel burn for 2020 and has reported a mark-to-market loss of around €1.5 billion which is expected to be incurred in cash during the year. Moody’s estimates that British Airways’ share of this cost in the range £600-700 million.”
“Moody’s expects that British Airways will incur substantial additional debt to support its liquidity and cash consumption during the coronavirus outbreak, and that cash generation is unlikely to be sufficient thereafter to restore balance sheet metrics by 2023.”
On the upside:
“At the same time the rating reflects Moody’s expectation that British Airways will remain a leading operator in the industry and that it is likely to gain market share and improve operational efficiencies after the crisis. This is supported by its position as the UK’s leading international scheduled airline, with a strong premium brand and competitive positions on key routes and airports including at London Heathrow Airport. It also reflects the company’s high operating margins, its extensive global network, further supported by its membership in the one-world alliance and its position within IAG, and its strategic importance to the UK’s economy and connectivity.”
Moody’s does not address the issues caused by the current British Airways order book, which had caused concern in the earlier Fitch report. Last year, British Airways placed a firm order with Boeing for 18 x Boeing 777-9 aircraft (pictured above). These have a list price – admittedly before a substantial discount which BA will have negotiated – of $442 million each.
As of February 2019, British Airways was also committed to 12 x Boeing 787s, four 777-300ERs and 18 x Airbus A350, albeit some of these are already delivered.
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