Rolls-Royce downgraded to junk by S&P

Rolls-Royce has lost its investment-grade rating — held for the past 20 years — after Standard & Poor’s on Thursday downgraded the company to junk status because of “prolonged weak profitability” and expectations of materially lower cash flow from its engine service contracts. The downgrade is a severe blow to the aero-engine company, which only last week announced plans to cut 9,000 jobs, mainly from its civil aerospace division. Like many of its aerospace peers, it has had to adjust its cost base to a market which could be up to 50% smaller in the next four years as a result of the coronavirus pandemic. Many large investors will have to sell their debt holdings in the FTSE 100 company, as they are restricted to investing in investment-grade bonds. It could also hit profitability of future long-term service contracts, as the perceived risk for customers of striking multiyear deals would increase. Rolls-Royce is doubly exposed to the current downturn, as it makes its profits on the number of hours its engines fly and is focused on the wide-body market where demand is expected to take significantly longer to return to 2019 levels. S&P said that despite the crisis Rolls-Royce had established a “strong liquidity position”. It said “sources of liquidity will exceed uses by more than two times over the next 12 months”. However, it expected Rolls-Royce’s civil aerospace division to be “materially affected by lower wide-body and business jet engine sales and lower engine flying hour-related receipts from airlines in 2020 and 2021”. Moreover, there was a risk that Rolls-Royce could post new one-off charges in the next 12 months.<br/>