Moody’s Lowers McDonnell’s Senior Debt Rating

Moody’s Investors Service lowered its rating on McDonnell Douglas’ senior debt Monday, citing the aerospace firm’s operational problems and heavy cash outflow.

The downgrading comes amid estimates that McDonnell Douglas could need more than $1 billion in additional borrowing this year to complete development of its MD-11 jetliner and to continue work on its troubled C-17 Air Force cargo jet program at its Douglas Aircraft unit in Long Beach.

McDonnell lost $84 million at its Long Beach unit in the first quarter, following some even heavier quarterly losses last year. The operation has fallen behind schedule on all of its major programs, prompting ever more serious remedial plans during the past 12 months.

The Moody’s action mirrors significant concerns that have developed within the Pentagon that McDonnell Douglas, the nation’s largest defense contractor, may face significant financial problems this year, according to informed sources.

But Moody’s analyst Tassos Phillippakos said, “I don’t think they will have a liquidity crisis. There will be money available to them if they need cash. The question is at what cost.”

A McDonnell Douglas spokesman said the downgrading “will not materially affect interest expense,” adding that it applies only to newly issued debt and will not affect the size of McDonnell’s payments on its $2.5 billion in existing debt.

Moody’s reduced McDonnell’s senior debt rating one step to Baa1 from A3, a classification that maintains the debt as an “investment grade” security but at the lower end of that spectrum. Many institutional investors have bylaws specifically forbidding the holding of debt that is not rated as investment grade.

In addition, Moody’s reduced McDonnell’s subordinated debt to Baa2 from Baa1, and lowered the rating on a shelf registration for a future debt issue. It maintained the rating on the McDonnell Douglas Finance Co. subsidiary.

McDonnell Douglas stock dropped sharply on a day when the broad market posted a record high. Its shares closed down $1 at $47.875, a sharp discount to its book value of more than $80 per share.

The debt rating agencies may be underestimating the trouble that McDonnell Douglas is facing, according to Michael S. Rosen, an aerospace analyst at the investment firm of Smith Barney.

“I think there is more risk than their ratings indicate,” Rosen said, although he also discounted the likelihood that McDonnell could face a cash crisis. “I don’t think the viability of McDonnell Douglas is at risk this year.”

Nonetheless, the current problems facing the firm are likely to have serious effects in the future.

Jack Modzelewski, an aerospace analyst at Paine Webber, said he is worried that McDonnell Douglas will miss an opportunity to earn profits that would sustain the firm after the current commercial aircraft boom is over.

“They only have four or five years to make some real money here,” Modzelewski said. “The key to the entire company is the MD-11. It has the real potential to make a lot of money.”

McDonnell is hoping to receive government certification for the jetliner and deliver the first five aircraft late this year, which could bring about $500 million in sales. But delays in certification will force additional borrowing quickly.

McDonnell spokespeople turned down a request for interviews with senior officials. The last time Chairman John McDonnell spoke to the press was at the firm’s annual meeting last month.