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Moody’s Cut Engine-Maker Rolls-Royce’s Credit Rating Cut to Junk

Moody’s Investors’s Service on Monday downgraded Rolls-Royce’s credit rating to junk, saying it expects “substantial” cash outflows as the engine maker takes a hit from the coronavirus pandemic.

Moody’s cut the long-term senior unsecured rating of Rolls-Royce to Ba2 from Baa3 and maintained a ‘negative’ outlook.

The ratings agency said it expects substantial cash outflows in 2020 and 2021, resulting in materially increased leverage, in excess of its previous expectations.

“The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets,” it said. “The combined credit effects of these developments are unprecedented. The aerospace and defence industry will be affected by the deep capacity cuts and financial stress for passenger airlines, leading to very significant reductions in aftermarket activity and widespread deferrals of new commercial aircraft deliveries.”

Moody’s noted that reduced flying hours as a result of the pandemic have “materially” affected Rolls-Royce, driving aftermarket revenues and cash flows lower, and leading to lower demand for commercial aircraft.

It does not expect commercial passenger demand to recover to 2019 levels until 2023 at the earliest, and said it is likely to remain severely constrained in 2021.

“New aircraft demand is likely to recover even slower than passenger demand, and there are substantial risks that Airbus and Boeing will need to cut production rates below current levels in response. Rolls-Royce is exposed to the widebody aircraft segment which is likely to recover more slowly than the market as a whole.”