Fitch Expects to Rate Boeing Capital's $750MM Senior Unsecured Notes 'A'

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CHICAGO--(BUSINESS WIRE)-- Fitch Ratings expects to assign an 'A' rating to Boeing Capital Corporation's (BCC) planned issuance of new senior unsecured notes ($500 million five-year and $250 million seven-year maturities). Proceeds from the new notes will be used to fund debt maturities over the next year and for general corporate purposes. BCC is a subsidiary of The Boeing Company (BA).

BCC's ratings are linked to BA's ratings due to the existence of a support agreement and other factors such as an operating agreement and transactional support provided to BCC by BA, but BA does not guarantee BCC's debt. The ratings cover approximately $11.6 billion of debt ($2.7 billion at BCC and $8.9 billion at BA, including $340 million of non-recourse debt). The Rating Outlook is Stable. See the full list of ratings below.

The Stable Outlook reflects favorable developments and conditions in parts of BA's portfolio which have partly offset the impact of developmental aircraft delays (787 and 747-8). The large commercial aircraft (LCA) market is in an upturn, and BA has announced a series of production rate increases for the 737 and 777 to meet its large backlog (nearly 3,400 aircraft at the end of June). Fitch expects BA's LCA deliveries could rise 7% in 2011 and as much as 19% in 2012. Fitch also expects U.S. core defense spending to rise in both 2011 and 2012, which should help BA's defense programs such as the F/A-18, and BA also has several substantial international defense contracts pending.

A key rating driver for BCC's ratings is the continued support of BA. BCC's ability to balance support of BA's aircraft sales with efforts to mitigate industry cyclicality and aircraft and obligor concentration risks are also important rating factors. BCC's overall portfolio quality should improve with Southwest Airlines Co.'s (rated 'BBB' with a Stable Outlook by Fitch) acquisition of AirTran Holdings, Inc. (BCC's largest exposure at approximately 30% of its portfolio). Fitch also notes that BCC sold and financed 15 717 aircraft acquired to Hawaiian Airlines.

Fitch believes the recent transaction with American Airlines (AMR) is modestly negative overall to BA and BCC's credit quality. Airbus gained a foothold with an exclusive Boeing customer and the terms of the transaction were very favorable for AMR, which could affect BA's cash flows once deliveries begin, but the financial impact will likely be minimal for the next few years.

Fitch views the financing commitment as the most significant element of the deal from a credit perspective. Airbus and Boeing committed to $13 billion in operating leases to support the deliveries of the first 230 aircraft beginning in 2013, with Boeing's share likely accounting for less than half of the total and spread over several years. Fitch understands that the terms in the AMR financing commitment are more favorable and specific than the typical backstop arrangements found in many aircraft deals, and as a result Fitch believes there is a higher than usual probability that BA/BCC will have to finance these deliveries using their own balance sheet.

BA and BCC will attempt to find other parties to provide financing before delivery or will attempt to sell off the leases after delivery, but the companies' success and risk will be dependent on the state of the aircraft market. Fitch notes that Boeing has arranged for alternative financing with respect to 25 of these new commitments. The financing arrangement illustrates the intensity of the AMR competition, but Fitch does not believe it indicates that BCC is abandoning its current 'lender of last resort' strategy.

As BCC's aircraft portfolio and corresponding debt have declined over the past five years, BA has maintained BCC's leverage at 5.0 times (x) via dividend payments to BA. In light of BCC's financing activities, Fitch continues to expect that, if necessary, BA would provide capital support needed to continue to maintain leverage at that level. Fitch also does not expect financing of the AMR transaction to result in an increase in BCC's targeted leverage of 5.0x.

As of June 30, 2011, BCC's liquidity included complete availability under $1.5 billion of bank facilities and $203 million of cash. BCC has approximately $8 million of debt maturing in the remainder of 2011 and $878 million maturing in 2012.

BA's debt ratings are supported by the company's balanced business portfolio (approximately 50% defense and 50% commercial), liquidity position, financial flexibility, access to the capital markets, debt maturity schedule, competitive positions in both of its main business lines, large backlog, and high levels of defense spending. Longer term, the 787 program and the lessons learned during its development could prove to be a competitive advantage.

Fitch's ratings for the parent company incorporate expectations for limited cash deployment in 2011 beyond dividends (approximately $1.25 billion annually). Fitch expects BA will focus on maintaining a large liquidity position before addressing debt reduction, pension contributions, and share repurchases. The company has no material debt maturities until 2012. BA's pension funding percentage on an FAS basis was 83% at the end of 2010, but it was fully funded on an ERISA basis. Required pension contributions in 2011 and 2012 are modest.

In addition to continued cash flow impact from delays in the 787 and 747-8 programs, other rating concerns for BA include margin levels that are low for the rating category; the outlook for defense spending beyond fiscal 2012; and the susceptibility of the commercial aerospace industry to shocks such as terrorism and disease. Two major labor contracts that expire at the end of 2012 are also potential concerns. Longer-term concerns include new competitors in the lower end of the narrow-body aircraft market.

Fitch currently rates BA and BCC as follows:

--Issuer Default Rating (IDR) 'A';

--Senior unsecured debt 'A';

--Bank facilities 'A';

--Short-term IDR 'F1';

--Commercial paper programs 'F1'.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research

-- 'Global Financial Institutions Rating Criteria' (Aug. 16, 2010);

-- 'Finance and Leasing Companies Criteria' (Dec. 13, 2010);

-- 'Rating Linkages in Parent and Nonbank Financial Subsidiary Relationships' (Nov. 29, 2010);

-- 'Aerospace & Defense 2011 Midyear Credit Review and Outlook' (July 11, 2011).

Applicable Criteria and Related Research:

Aerospace & Defense Midyear Credit Review and Outlook

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=539172

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=587245

Rating Linkages in Nonbank Financial Subsidiary Relationships

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=577325

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Fitch Ratings
Boeing Capital Corporation
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