Fitch Ratings has stated that the expiration of the US Export Import Bank’s (Ex-Im) charter “would marginally reduce the competitiveness of the US manufacturers, but likely not enough to affect credit ratings in isolation”. The rating agency added that some manufacturers might need to raise debt levels to provide greater amounts of customer financing, but stated that the debt increase would be “limited by the relatively small percentage of exports financed by Ex-IM, as well as the current availability of third party financing”.
The aerospace sector is most exposed to the potential expiration of the charter, with Boeing (A/Stable Outlook) and other US aviation manufacturers left as the only global players without export credit agency (ECA) support. Lack of Ex-Im reauthorization would be felt most during a market downturn or credit crisis, with aircraft and engine manufacturers likely stepping in to provide some funding. Even during strong markets, the likely increase in financing costs from market providers could have an incrementally negative impact on aircraft purchasers, and therefore on aerospace demand from US manufacturers.
Fitch believes Boeing has the financial strength to add customer financing assets to its balance sheet while maintaining its current ratings. Boeing’s consolidated cash at the end of the first quarter was $9.6 billion, compared to $9.0 billion of debt. Free cash flow (cash from operations less capex and dividends) was $4.5 billion in 2014, and Fitch expects FCF will be flat to down modestly in 2015 as a result of higher capex and dividends.
Boeing Capital Corporation (BCC), which is fully consolidated into Boeing, has substantially reduced its portfolio over more than a decade as a result of its successful transition from being a capital provider to a facilitator of third party financing. BCC had assets of approximately $4.1 billion at the end of the first quarter, compared to $12.6 billion at the end of 2002. A return to historical portfolio levels at BCC could negatively affect Boeing’s ratings, but Fitch believes this is not a likely scenario, and BCC could add several billion of assets without affecting Boeing’s ratings.
The New Aircraft Sector Understanding’s (ASU) impact on aircraft financing is a part of the Ex-Im debate which Fitch feels has received less attention than it deserves. Even with re-authorization Fitch expects the percentage of aircraft financed with ECA guarantees to decline, partly because of the NASU, which has raised ECA fees and made ECA funding costs more in line with market rates for stronger credits. Ryanair (BBB+/Stable) is a good example of an airline that has shifted its debt financing to the public markets, partly in response to the NASU.
The NASU may have already achieved a middle-ground solution which reduces the reliance on ECAs over time in the aviation sector. It has fostered an aircraft finance market more focused on market-based pricing, while preserving the benefits of ECA financing in downturns, and it illustrates the benefits of multi-party negotiations rather than unilateral actions.