Brazilian aircraft manufacturer Embraer has been downgraded further into junk to BB from BB+ by S&P with a negative outlook due to the challenges and uncertainties faced by the aerospace and defence industry post the pandemic. Embraer’s commercial aircraft deliveries are likely to remain below pre-pandemics levels till 2022 which would lead to a cash burn of $100mn-$200mn in 2021 and an increase in the company’s leverage. The net debt to EBITDA is forecasted to be ~5x in 2021 and ~4x in 2022. The funds from operations (FFO) to debt is forecasted to be 5-10% in 2021 and above 12% in 2022. This is based on the assumption that the company will sell only 50-55 commercial aircrafts in 2021 against the previous projections of 70-75 aircrafts. This number is expected to increase to 70 in 2022. Even though the company is well positioned in the medium aircraft category of 70-130 seater aircraft and has done well in the executive jet and defence business, its performance is expected to be weaker than its peers. The rating agency said, “We estimate that the company’s EBITDA margins will remain below 10% for the next two years. After consecutive years of lower profitability than those of peers and the termination of the agreement with Boeing, Embraer went through a series of cost cuts last year, including the reduction of its workforce by about 15%. Despite a limited increase in deliveries in 2021, the cost cuts should allow the company to post EBITDA margins of 8%-9%, compared with the estimated 3%-4% in 2020. However, we still view such a level as weaker than the industry average.”
The plane maker was downgraded by Fitch to BB+ from BBB- on 28 April 2020 and by S&P to BB+ from BBB- on 15 June 2020. It’s 5.4% 2027s and 6.95% 2028s are down 0.05 and 0.18 to trade at 106.13 and 113.26 yielding 4.22% and 4.68% respectively.
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