BA furious over 'junk' credit rating

Shares in flag carrier dive after Standard & Poor's cuts debt to sub-investment grade
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British Airways reacted furiously yesterday after Standard & Poor's cut its credit rating to junk status, prompting a fall in the airline's share price.

S&P said it could no longer justify an investment grade rating on BA following a review of its creditworthiness in the aftermath of the Iraq war and the Sars outbreak.

Downgrading BA's corporate credit rating to BB+ and its unsecured senior debt to BB-, S&P's credit analyst, Bob Ukiah, said: "As a result of the more challenging industry environment, Standard & Poor's believes that BA's financial profile and credit measures are no longer, nor are likely to be over the next several years, appropriate for an investment-grade rating."

The downgrading makes BA is one of only three UK corporations to have suffered the humiliation this year of seeing its credit rating cut to junk status. The other two are Invensys and Cable & Wireless.

BA's German rival Lufthansa still has an investment-grade credit rating but all of its American counterparts are junk rated.

Among the concerns S&P pointed to were BA's £1.2bn pension deficit, the high financial leverage that came from having gross debts of £6.8bn and its over-exposure to the North Atlantic market. But John Rishton, BA's finance director, responded with incredulity, saying: "I am astonished that Standard & Poor's has chosen to downgrade us at this time. Since the last Standard & Poor's review we have exceeded all our financial and restructuring targets and only last week Moody's confirmed its rating for the company and its debt."

Mr Rishton said the credit rating agency's move would have no direct financial impact on BA. He also dismissed the idea that BA would need a rights issue to shore up its balance sheet.

BA has net debt of £5.2bn - about three times its market capitalisation - made up of £350m in bonds and the rest in bank borrowings. But the junk rating will not increase interest charges on existing borrowings because none of the debt is credit rating related. Nor does BA need to raise any new finance because it has committed finance for those few aircraft due to be delivered between now and the end of next year.

Mr Rishton added that BA's net debt was down by £1.4bn from the peak and the company had targeted a further £2bn reduction over three years. Annualised cost savings under its "Future Shape and Size" programme were £570m - well ahead of the £450m target. In addition, job reductions of more than 10,000 had been achieved since August 2001 and the airline was on course to achieve 13,000 by this September. Capital expenditure, at £319m, was also below the planned target of £450m while European losses had halved to £117m.

"The war is over, Sars is fading, the US economy is showing signs of recovery and traffic volumes are improving from the worst levels," he added. "It just seems an extremely strange time to downgrade us."

S&P was unmoved, however, saying: "The ratings on BA reflect the group's high financial leverage, additional future pension contributions, sustained competition in key markets, structural deterioration in its business mix and an above-average exposure to North Atlantic traffic. Those weaknesses are only partly mitigated by BA's proven ability to reduce costs, its position as a main player at London Heathrow airport and in the Oneworld alliance, as well as the modest requirements over the foreseeable future."

BA shares fell by more than 5 per cent at one stage although they rallied later in the day to close 2.5 per cent down at 147.75p, valuing the airline at £1.6bn. Analysts nevertheless said the S&P downgrading could make it more difficult for BA to claw its way back into the FTSE 100 index of leading British shares.