Spirit AeroSystems Inc. Ratings Placed On CreditWatch Negative Due To Possible Coronavirus Impact

  • The significant decline in air travel due to the coronavirus could result in lower demand from Spirit AeroSystems Inc.'s aircraft manufacturing customers, putting pressure on earnings and cash flow in 2020.
  • Therefore, we are affirming our ratings, including the 'BB' issuer credit rating, and placing them on CreditWatch with negative implications.
  • We will resolve the CreditWatch placements when we have more information on possible production cuts by Boeing or Airbus, or further delays to the Boeing 737 MAX recertification or planned 2020 production due to the coronavirus.
WASHINGTON D.C. (S&P Global Ratings) March 26, 2020-- S&P Global Ratings today took the rating actions listed above.
The significant decline in global air travel due to the coronavirus could result in increased order deferrals or cancellations from airlines, prompting Boeing and Airbus, Spirit's main customers, to reduce production. This could put further pressure on the company's earnings and cash flow in 2020, which we had already expected to be weak due to the production halt on the 737 MAX. The coronavirus could also delay certification of the MAX due to government restrictions on travel or employee illnesses. We do not expect the company's military programs to be materially affected unless production is disrupted due to the pandemic.
Liquidity should be sufficient for the company's financial and operational needs in 2020 unless there is a material deterioration in cash flow. At Dec. 31, 2019, the company had almost $2.4 billion of cash, but no revolver availability because it was fully drawn. The company subsequently put in place a $375 million delayed-draw term loan in case MAX cash outflows were higher than expected, but this facility is only available until Sept. 15, 2020, or 45 days after the MAX is certified. Our base case assumed free cash flow to be negative $350 million for 2020, but the first quarter was likely higher than that, with flat to modestly positive cash flow in the second half of the year. Therefore, cash balances could now be $500 million-$600 million below the year-end balance since the company also completed a $120 million acquisition.
We will resolve the CreditWatch placements when we have more information on possible production cuts by Boeing or Airbus or further delays to MAX certification related to the coronavirus, as well any disruptions to production. We could lower the rating if these factors result in earnings or cash flow being much lower than we expect in 2020 and we believe funds from operations to debt will not increase above 20% in 2021 or liquidity becomes constrained. Other factors unrelated to the coronavrius that could result in a downgrade include: certification of the MAX being delayed further, MAX production at a lower rate than we currently expect, the company cannot reduce costs sufficiently during the period of lower production or encounters problems restarting production, or cash outflows are significantly higher than we forecast in 2020.
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