McDonnell’s Debt Downgraded by Moody’s and S
In a widely expected move, Wall Street Friday downgraded the ratings of McDonnell Douglas debt, citing the beleaguered aerospace firm’s deteriorating financial position.
The downgrading, by both Moody’s Investors Service and Standard & Poor’s Corp., will affect about $3 billion in long-term debt and increase interest expenses on an additional $1 billion the company is expected to borrow by the end of the year.
The lower ratings reflect cost overruns on McDonnell’s A-12 and T-45 military aircraft programs, hefty cash requirements for its MD-11 airliner and an overall decline in military spending, analysts said.
The downgrading comes despite an announced $700-million cost-cutting program, a drastic measure to improve profitability of the ailing St. Louis company. The program will eliminate up to 17,000 jobs this year, including 9,000 in Southern California.
“We have seen the company’s balance sheet weakening and we have seen certain liquidity pressures,” said Tassos Philippakos, aerospace analyst for Moody’s. “It is possible that the company’s balance sheet will weaken even further, at least in the near term.”
Moody’s lowered McDonnell’s senior debt rating to Baa3 from Baa1 and that on subordinated debt to Ba2 from Baa2. The service also downgraded McDonnell’s commercial paper and shelf registration ratings.
In addition, Moody’s lowered the debt ratings of McDonnell Douglas Finance Co., a financial subsidiary with $2.5 billion of debt.
S&P; announced similar downgradings, decreasing McDonnell’s senior debt to BBB-plus from single-A-minus, its subordinated debt to BBB from BBB-plus and shelf-registered debt to BBB-plus from A-minus.
S&P; did not downgrade McDonnell Douglas Finance Co.’s senior and subordinated debt, but held them on its watch list.
All of McDonnell’s debt is still considered investment grade, although the Baa3 ranking that Moody’s gave the corporation’s senior debt is just above its “speculative” grades.
In announcing the downgradings, the ratings services cited potential cost overruns on McDonnell’s A-12 attack jet and T-45 trainer programs. McDonnell disclosed this month that it would not take a charge against second-quarter earnings for its highly classified A-12 program for the U.S. Navy.
Instead, McDonnell will ask the Navy to cover cost overruns on the fixed-price contract.
“We believe there is a good possibility, although management has decided it would not take writeoffs, eventually, it may have to,” Philippakos said.
In addition, McDonnell’s Douglas Aircraft unit faces a short-term cash drain in connection with its MD-11 airliner. Citing inefficiencies, technical problems and delays, analysts estimate that Douglas will lose $100 million in 1990, following a $222-million loss in 1989.
Although orders for 157 MD-11’s eventually will brighten McDonnell’s cash position, development costs could strain the company until the new aircraft wins Federal Aviation Administration approval, analysts said.
The company is pushing for an Oct. 31 approval, a goal that could prove ambitious, said Lawrence M. Harris, a senior analyst for the Los Angeles-based Bateman Eichler, Hill Richards investment firm.”
Harris estimated that McDonnell needs to borrow an additional $1 billion during the rest of the year to finance inventory growth stemming in part from the MD-11 program. Friday’s downgrading will mean higher interest costs on the borrowing, he said.
By the end of June, McDonnell’s debt, including that of its financial subsidiary, was $5.2 billion, Harris said.
Analysts and the company predict little impact on the operations.
“It’s basically like your kid getting a slightly lower grade in school,” said Wolfgang Demisch, an aerospace analyst with UBS Securities in New York. “But it’s not like he’s going to drop out or anything like that.”
McDonnell spokesman Barbara Anderson, also predicting no disruption of operations said: “McDonnell Douglas does not feel its performance, financial condition or future prospects warrants these measures.”
Because McDonnell’s debt has been on the ratings services’ watch lists since June, Friday’s announcements drew little surprise from Wall Street. McDonnell stock closed at $42.75 a share Friday, up 12 1/2 cents.
