Fitch: U.S. Commercial Aerospace and Defense Sectors Both Stabilizing, But Event Risk Remains.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 11, 2003

From a general credit perspective, Fitch believes the worst is probably behind the commercial side of the U.S. aerospace and defense business, but the best is probably behind the defense side of the business, according to an outlook and review of the sectors published yesterday by Fitch Ratings. The rating agency has published several 2004 outlooks concerning various industries as well as other fixed-income sectors.

Fitch expects overall credit quality in the Aerospace and Defense industry to improve in 2004 as a result of the continued strength of U.S. defense spending and the likely stabilization of the global commercial aerospace industry. After several years of decline, the industry's credit statistics probably reached a trough in 2003, which was a more challenging year than expected as a result of the SARS crisis and the Iraq conflict.

Key assumptions in Fitch's 2004 outlook include a modest global economic recovery, continued political support for U.S. defense spending, and financial pressures on European defense budgets. An economic recovery is particularly important for the commercial aftermarket, which is driven by economically sensitive airline traffic. Fitch recognizes that the commercial aerospace sector continues to be very vulnerable to 'event risk,' and Fitch's outlook for the commercial aerospace sector could be altered by events such as terrorist attacks or other exogenous and unpredictable events.

Cash flow remains strong in the industry, and cash deployment will be a key credit issue in 2004. Fitch estimates that year-end 2003 cash balances at the top 10 investment grade aerospace & defense companies (excluding finance subsidiaries) in the U.S. will be more than $9 billion, while estimated 2004 free cash flow will be more than $10 billion, debt maturities will be less than $2 billion, and dividends will be less than $4 billion.

Rating actions for commercial aerospace companies in 2004 will likely consist of credit outlook revisions. Rating upgrades are less likely than outlook revisions in the next twelve months because of some continuing weaknesses in parts of the commercial aerospace industry, as well as the "event risk" mentioned above. Fitch expects the pace of defense rating actions to slow in 2004. Several large defense companies are approaching their rating objectives and have begun to slow the rate of debt reduction.

The full outlook 'Aerospace and Defense: 2004 Outlook' can be found on Fitch's website at 'www.fitchratings.com' by linking to the 'Corporate Finance' sector, clicking on 'Corporates' and then 'Special Reports'. Fitch also will be maintaining a web page with a full list of 2004 outlook pieces that will be readily available on 'www.fitchratings.com'.