TEXT-S&P revises Spirit Aerosystems rating outlook

Fri Oct 26, 2012 10:02am EDT

Related Topics

Overview
     -- Spirit announced today it will take a $590 million pretax forward loss 
charge in third-quarter 2012 because of cost overruns on several development 
programs, which will likely result in much lower free cash flow in 2013. 
     -- We are revising our outlook to stable from positive and affirming the 
'BB' corporate credit rating. 
     -- The stable outlook reflects our expectation that key credit metrics 
will remain strong for the rating but it is unlikely the company will be able 
to generate sustainable positive free cash flow until at least 2014. 

Rating Action
On Oct. 26, 2012, Standard & Poor's Ratings Services affirmed its ratings, 
including the 'BB' corporate credit rating, on Wichita, Kan.-based 
aerostructure supplier Spirit AeroSystems Inc. and revised the outlook to 
stable from positive. 

We are also affirming our 'BBB-' rating on the company's $1.2 billion senior 
secured credit facility (which includes a $650 million revolver and a $550 
million term loan), with a recovery rating of '1', which indicates very high 
recovery (90%-100%) in a payment default scenario. We are affirming our 'BB-' 
rating on Spirit's $600 million unsecured notes with a recovery rating of '5', 
indicating expectations of modest recovery (10%-30%) in a simulated default 
scenario.

Rationale
The outlook revision reflects our view that problems executing new programs 
will result in 2013 free cash flow being much lower than our previous 
expectations and will delay a turn to sustainable positive free cash flow 
until at least 2014. Spirit announced it will be taking a $590 million pretax 
forward loss charge in the third quarter of 2012, reflecting its expectation 
of higher future costs related to materials, labor, and factory support on the 
787, G280, and G650 programs. Although the charge is noncash now, the higher 
costs will result in additional cash outflows over the next few years. Spirit 
has obtained lender consent to loosen covenants in its credit facility through 
the second quarter of 2013 because this charge would result in a violation of 
financial covenants. Separately, Spirit also announced that it reached a final 
settlement with insurers for all claims related to an April tornado that 
damaged a facility. Spirit has already received $105 million and will receive 
an additional $130 million, likely in the fourth quarter 2012, to cover 
significant repairs expected to occur in 2013.

We assess Spirit's financial risk profile as "significant," which reflects 
above-average credit metrics for the rating and large investment needs to 
participate in new programs, which has resulted in significant negative free 
cash flow since 2005. Debt to EBITDA was 2x and funds from operations (FFO) to 
debt was 35% for the 12 months ended June 28, 2012. We expect modest 
improvement over the next year (after adjusting for this one-time charge) 
mainly because of increasing production rates on the profitable 737, which 
accounts for roughly 50% of total sales. 

We expect that positive free cash flow in 2012 will only be temporary, as the 
company benefits from one-time insurance proceeds along with $200 million in 
cash advances from Airbus related to the A350 program. In 2013, we expect that 
free cash flow will again be negative because of higher costs on development 
programs combined with cash outlays to repair tornado damage to its Wichita 
facility. In the long term, we expect free cash flow to get a significant 
boost from material production increases of the 787. However, the 787 program 
has been delayed several times in the past, and we believe the planned 
increase in production rates involves significant operational and financial 
risks. 

We view the company's business risk profile as "fair," which reflects Spirit's 
limited customer and program diversity. In an attempt to improve diversity, 
Spirit won awards on several non-Boeing aircraft programs in recent years, 
including the Airbus A350, Sikorsky CH-53K military helicopter, Mitsubishi MRJ 
regional jet, and the Gulfstream G280 and G650 business jets. These aircraft 
are all in various stages of development or initial production. At the same 
time, Spirit has had to manage increasing production rates on the 737 and 787, 
which has proved challenging, resulting in a modest deterioration in operating 
efficiency. Still, Spirit remains the largest independent supplier of 
commercial aerostructures with solid positions on popular aircraft. 

Liquidity
We view Spirit's liquidity as "adequate." We expect sources of liquidity to 
exceed uses by at least 1.2x over the next 12 months. We also expect sources 
to exceed uses even if EBITDA declines by 15%. 

On June 28, 2012, Spirit had $180 million of cash on the balance sheet. The 
company also has an undrawn $650 million revolving credit facility that 
matures in 2017. Because of the recently announced $590 million charge, Spirit 
needed to amend financial covenants to maintain access to the revolver. We 
expect the company to remain in compliance with the revised covenants over the 
next year. 

Free cash flow was $29 million through the six months ended June 28, 2012, and 
we expect about $350 million in free cash flow for full-year 2012 (including 
one-time payments). However, we expect that free cash flow will be volatile 
over the next 12 months, as large inflows and outflows occur. A positive 
factor includes cash collection on 787 deliveries to Boeing, which only began 
to occur recently after Spirit repaid a large portion of cash advances that 
Boeing made in prior years. However, working capital and capital spending 
requirements will likely increase to support new programs, as well as higher 
build rates on existing programs. 

Recovery analysis
For our full recovery analysis, see our recovery report published March 28, 
2012, on Ratings Direct.  

Outlook
The outlook is stable. Adequate near-term liquidity, expected improved 
performance on existing programs, a sizable backlog, and healthy demand for 
commercial aircraft should help Spirit maintain its current credit quality. We 
expect increasing costs and investment in new programs to pressure free cash 
flow and prevent an upgrade over the next 12 months. However, we could raise 
the ratings if the 787 program deliveries result in free cash flow to debt 
increasing to more than 10% for a sustained period. We could lower the ratings 
if the commercial aerospace market deteriorates significantly, or if any 
additional problems on the 787 or other programs have a material adverse 
effect on key credit metrics or liquidity, such that FFO to debt falls below 
25% or cash and revolver availability declines below $200 million.

Related Criteria And Research
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept 28, 2011
     -- Key Credit Factors: Methodology And Assumptions On Risks In The 
Aerospace And Defense Industries, June 24, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008


Ratings List
Ratings Affirmed; Outlook To Stable
                                        To                 From
Spirit AeroSystems Inc.
 Corporate Credit Rating                BB/Stable/--       BB/Positive/--

Ratings Affirmed

Spirit AeroSystems Inc.
 Senior Secured                         BBB-               
   Recovery Rating                      1                  
 Senior Unsecured                       BB-                
   Recovery Rating                      5
FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.