Fitch Downgrades BA Credit Rating To Junk: Do Such Agencies Have Much Credibility?

No-one is under any illusion that airlines are in a dire situation due to the ongoing saga of COVID19. So it comes as no surprise that their financing would be under strain. Many of you may have experienced this first hand, with the difficulty of getting refunds of cancelled trips. There may be questions of how airlines can sustain themselves though the current climate.

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Fitch Downgrades BA Credit Rating

Bloomberg reports BA Credit has now been downgraded to junk. British Airways now carries a rating of BB+, with a negative outlook.

What does that mean?

Crucially the new rating means it just falls out of the “investment grade” category. Investments are as much about perceptions as hard facts. So perceptions matter.

Recall, British government pledged a package of £330 billion to help businesses. For large companies, access to cheap loans were contingent on being “investment grade” i.e having a rating of BBB or above.

Specifically, “The facility is open to firms that can demonstrate they were in sound financial health prior to the shock, allowing us to look through temporary impacts on firms’ balance sheets and cash flows from the shock itself. This means companies that had a short or long-term rating of investment grade, as at 1 March 2020, or equivalent.“

While it seems British Airways may still be able to secure a loan via Bank Of England Credit facility. There will no doubt this rating would affect their ability to finance the aircraft orders on their books via the regular market.

Is British Airways Any Different to Other Airlines?

In the greater scheme of things, no. Through IAG, British Airways is in a comparatively stronger position than many airlines. What we have is a very specific disrupter that is affecting all airlines to a lesser or greater degree.

Fitch cites “Major Capacity Reductions” among several other aspects.

The sooner we have this virus under control, there quicker companies can bounce back to health.

Can these Credit Agencies Be Trusted?

I would not be surprised if those agencies are being overzealous in some cases. If you are old enough to remember the financial crisis. You may recall, those very agencies were rating banks highly. Misrepresenting risks associated with mortgage related securities when some banks had dangerous levels of exposure to it.

What I struggle to understand, is how they deem IAG, to have a stable outlook, but not BA. BA is IAG biggest and prized asset. They highlight the rating is independent due to BA and IAG being separate legal entities. There is no cross-guarantees among IAG entities. This is a technical view.

On a practical level, you could say they are one and the same. As I cannot imagine a scenario where BA would go under, without IAG exhausting all option it has at its disposal to provide liquidity.