McDonnell Douglas Debt Rating Reduced

Standard & Poor’s Corp. lowered the ratings Tuesday on McDonnell Douglas debt, the third such reduction since last year, citing cost pressures on military programs and the recent cancellation of the $57-billion Navy A-12 attack jet program.

The St. Louis-based aerospace firm’s senior debt was reduced to a BBB rating--the lowest rating still considered “investment grade.” Many institutional investors have bylaws requiring that they hold only investment grade securities.

The downgrading affects all of McDonnell’s $5.6 billion in debt, including that issued by the firm’s financial services unit. The aerospace side of the firm holds $2.06 billion in long-term debt and $909 million in short-term debt, primarily in the form of bank loans.

In issuing the downgrade, S&P; cited the $1.3-billion reimbursement that the Navy has demanded from McDonnell and its partner General Dynamics as a result of the A-12 termination.

McDonnell has said it expects that an appeal will result in the cancellation being relabeled a “convenience of the government” termination, in which case the $1.3-billion demand would vanish.

A company spokesman said the firm was “disappointed” by the downgrading.

Securities analyst Howard Rubel of C. J. Lawrence, Morgan Grenfell said he considered the downgrading a “non-event” because the bond market has already effectively downgraded McDonnell bonds to a yield similar to that of a non-investment grade security.

While a standard BBB bond pays about 10% annually in its yield to maturity, the McDonnell bonds are yielding 14%, Rubel said. “S&P; is making this downgrading looking through a rearview mirror,” Rubel said.