Kuala Lumpur: The restoration of aerospace suppliers’ credit metrics to pre-pandemic levels will take many years and vary by company, said Moody’s Investors Service.
“We believe that credit metrics for the broader supply chain troughed in early 2021 as companies experienced the full financial impact of the Covid-19-triggered slowdown that began in the late first quarter of 2020.
“In the first half of 2021 (1H2021), we expect most suppliers to have limited financial flexibility with debt/earnings before interest, taxes, depreciation, and amortisation metrics well in excess of their historical levels,” it said in a note Friday.
It added that in aggregate, the commercial aerospace supply chain represents about US$50 billion of rated debt.
The rating agency noted that the path to recovery would vary across the supply chain.
For individual suppliers, the degree and pace of recovery would depend on a number of factors, including the level of exposure to commercial aerospace, the type of products that the supplier manufactures and the supplier’s exposure to different aircraft types, it said.
It expects widespread increases in air travel starting in 2H2021, accelerating through 2022.
“This positive demand trend would run for many quarters into 2023, as coronavirus vaccinations increase and governments around the globe lower barriers to entry for travel,” it said.
However, the recovery in credit quality for the aerospace supply chain would substantially lag the uptick in air travel, largely due to the long-cycle nature of the aerospace supply chain which is both capital- and manufacturing-intense.
“Many suppliers have large fixed overhead cost structures and will not see a significant improvement in their credit metrics until aircraft production volumes increase materially; something that we do not expect to happen over the near-term,” it added.
Moody’s expects most suppliers to generate limited free cash flow as earnings remain muted over the near-term – this year right to 1H2022; and reckons that cash generation would improve by late 2022 and beyond.
“The cash that many suppliers raised in 2020 would support adequate liquidity across most of the supply chain, and we continue to expect original equipment manufacturers and tier-one suppliers to provide – on an as-needed basis – financial support to downstream companies facing near-term liquidity pressures.
“However, several very low rated companies are at risk because they have weak liquidity and performance issues that predate the coronavirus,” it added.
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