DUFF & PHELPS RATES MCDONNELL DOUGLAS SENIOR DEBT 'BBB-'
CHICAGO, June 23 /PRNewswire/ -- Duff & Phelps Credit Rating Co. has assigned a rating of `BBB-' (Triple-B-Minus) to McDonnell Douglas Corporation's (NYSE: MD) $200 million issue of non-callable notes due July 1, 2000, which have a coupon of 8 1/4 percent. This rating is identical to the existing rating of McDonnell Douglas Corp.'s senior debt. This rating recognizes McDonnell Douglas' (MD) diversified portfolio of government programs, which are expected to generate cash flows more than sufficient to meet debt obligations despite uncertainty regarding certain major government and commercial programs. Existing contracts on MD's various combat aircraft (F/A-18, F-15, T-45, AV-8B Harrier, A4-64 Apache), missiles (Tomahawk, Harpoon), and space programs should provide ongoing cash flows over the next several years. The rating also recognizes the high degree of uncertainty regarding the future cash flow impact of the C-17 program, resolution of the A-12 cancellation, and the continued adverse industry conditions for the commercial aircraft unit. MD's current debt levels are largely the result of the significant investments in these programs. Duff & Phelps believes the C-17 will remain in production by MD. However, continuation of the C-17 transport has been called into question due to cost overruns and alleged mismanagement of government payments. Cancellation would result in lost revenues of about $2.5 billion per year. Again, the chance of complete elimination of the program is remote. Further, cancellation could result in sizable cash inflows to MD as inventories are reduced and claims collected. There remains the possibility that MD could be required to pay its share of up to $1.3 billion to the Navy in resolution of the A-12 cancellation. The probability of a detrimental resolution is low, particularly over the near term, and this risk is consistent with the `BBB-' rating. MD's Douglas Aircraft unit has been seriously impacted by the weak commercial aircraft industry. Few orders for the MD-11 and MD 80/90 have led to a declining backlog, despite very low production levels. Management has made significant progress in reducing its breakeven cash costs. Nevertheless, until industry conditions improve, which we do not foresee over the near term, this segment is likely to hinder the pace of improvement in financial performance. Ratings on the debt of MD's financial subsidiary, MDFC, reflect its success in reducing its non-core portfolio and the consistent solid performance of its core aircraft and commercial equipment leasing businesses balanced against its remaining real estate exposure, which will take several years to liquidate. In addition, MDFC's ratings are limited by MD's financial strength, ownership interest, and MDFC's increasingly captive status as a financing arm for MD aircraft sales. Non-MD related receivables now total 44 percent of the portfolio versus 58 percent at yearend 1991. Positively, upstream loans from MDFC to MD are limited by debt covenants to 25 percent of MDFC's net worth and dividends are limited by leverage and minimum net worth requirements. We believe MD's management will meet its goal of reducing 1993's debt by $1 billion in 1993 through operating cash flows and asset sales. During the first quarter, debt was reduced by almost $300 million. If management's debt reduction goal is achieved, then the fixed obligation ratio would fall to near 50 percent from 1992's 58 percent on a consolidated basis. The fixed charge coverage is expected to improve to near 2 times for 1993. -0- 6/23/93 /CONTACT: William T. Hayes, CFA of Duff & Phelps Credit Rating Company, 312-368-3142/ (MD)
CO: McDonnell Douglas Corporation ST: Missouri IN: ARO SU: RTG
TM -- NY082 -- 5234 06/23/93 18:36 EDT
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|Date:||Jun 23, 1993|
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