Fitch Ratings has affirmed Embraer S.A.'s Long-Term Foreign and Local Currency Issuer Default Rating (IDR) at 'BB+' and its National Scale Rating at 'AAA(bra)'.
Fitch has also affirmed the 'BB+' unsecured notes of Embraer Overseas Limited and Embraer Netherlands Finance BV. The Rating Outlooks for the IDRs and National Scale Rating are Stable.
Embraer's ratings reflect its competitive positions in the commercial and business jet markets; large backlog (USD18.4 billion) covering several years of sales; and some product portfolio diversification that further includes defense programs and solid operations of its services and support segment. Embraer's robust liquidity profile (mostly held outside Brazil) and its large export revenues combined with some offshore operating cash flow further support its ratings. Fitch forecasts Embraer's consolidated net leverage to remain around 2.5x in the next three years, while it develops its new business segment (Eve Holdings Inc.). Embraer will be challenged to reduce its gross leverage, which is expected to decline to around 5.3x by 2024, as operating cash flow generation improves.
Key Rating Drivers
Ongoing Backlog and Deliveries Recover: Fitch expects commercial aircraft deliveries for 2022 to be 36% below 2019 levels and 21% and 13% for 2023 and 2024, (close to the company's guidance of 60, 70 and 80 aircrafts deliveries per year), respectively. For business jet deliveries, the rebound has been faster with 6% lower deliveries in 2022 and an increase of 15% in 2023 and of 24% in 2024 (close to the company's guidance of 100, 125 and 135 aircrafts deliveries per year, respectively). During 2022, Embraer and the global aerospace & defense industry as whole, suffered from materials shortages and supply chain constraints, which affected deliveries targets. Fitch expects this scenario to improve throughout 2023, which should support the ongoing rebound in deliveries.
Embraer's firm order backlog (commercial aviation) stood at 297 aircraft at the end of 3Q22, up from 281 in 4Q20, but still below 338 in 2019 (pre-pandemic). In terms of financial backlog, it has already surpassed pre-pandemic levels, with USD17.8 billion at the end of 3Q22, amount higher than 2019, and improvement from USD14.4 billion at the end of 2020. In Fitch's view, Embraer's backlog supports production for the next several years but suffers from concentration and quality. Embraer remains working to boost the orders of its E2 aircraft.
Strong Market Position: Embraer's strong market position for commercial jets with fewer than 150 seats and within the global executive jets are key factors supporting the expected recovery in the company's backlog in the medium term. Midsize commercial jets producers are expected to continue to have opportunities with mainline or low-cost carriers that are looking to rightsize their fleet to adjust capacity. The weaker financial or business position of few competitors, or in some cases a change in strategy, are allowing growth opportunities for Embraer that are helping the company to see deliveries rebound in 2023/2024. Embraer's high exposure to the U.S. regional/domestic market, which have seen a stronger recover in some markets, are also facing some infrastructure constrains. The performance of those markets is also a key rating consideration and should help to drive commercial aviation deliveries.
EBIT Margin Recovering: Embraer's operating performance is expected to improve as deliveries rebound. During 2022, Fitch projects that Embraer's EBIT margins will recover to around 4.6% and will continue to expand in 2023 and 2024 to around 6%, with the likely increase in backlog. During pre-pandemic period as the company was facing pressures as it navigated several new development programs. The lower deliveries in commercial aviation and less favorable mix have affected the company's fixed cost dilution during the 2020-22 period.
Strong Working Capital Boost in 2022: Embraer is expected to post strong FCF generation during 2022 but ongoing capex programs and developments at EVE will pressure FCF in the next 2-3 years. The increased operating cash flow generation in 2022 and mostly, an important inflow of working capital (mostly pre-delivery payments), is expected to drive FCF to well above the guidance of USD150 million, per Fitch's estimative. This represents an improvement from the USD1 billion of FCF burn in 2020 and positive FCF of USD239 million in 2021. Fitch estimates consolidated capex is estimated around USD250 million. For 2023 and 2024, FCF is expected to be negative at USD227 million and USD292 million, after capex of USD396 million and USD555 million (including EVE), respectively. For 2022-2024, Fitch's rating case does not currently assume dividend distributions.
Net Leverage Trending Down: Fitch forecasts Embraer's net debt/EBITDA to reach 2.4x in 2022, down from 4.3x in 2021, and then to stabilize around 2.3x. This compares with 20.7x in 2020, 4.1x in 2019 and average of 1.0x during the 2015-2017 period. On gross leverage, Embraer's leverage remains high for the rating, rating around 7.9x-5.3x over the next three years. The company's ability to maintain positive FCF generation, to reduce gross leverage, while maintain net leverage consistently below 2.5x during the next years and navigate the development of EVE is key to potential positive rating actions in the medium term.
Modest Brazilian Risk: Approximately 90% of Embraer's revenue is generated from exports or from business operations based abroad. Nonetheless, Brazil's economic and political environment is a concern as the majority of Embraer's operating asset base is locally domiciled, and the government represents a large portion of the defense segment backlog. Brazil is listed as a related party in Embraer's SEC filings as a result of the Brazilian government's 'golden share' and a direct shareholder stake (approximately 5% of Embraer) via a company controlled by the government. Embraer's recent contract renegotiations with the Federal Government was an item to watch, but Fitch does not expect any major impact to cash flow.
Rating Above Country Ceiling: Fitch does not consider Brazil's country ceiling a rating constraint for Embraer currently, given the company's large cash holding outside of Brazil, as well as its heavy focus on exports, stand-by credit facility and growing business outside of Brazil. Based on these factors, under Fitch's criteria, Embraer could be rated up to three notches higher than the Brazilian country ceiling.
Derivation Summary
Embraer is one the market leaders for commercial jets with fewer than 150 seats. Its aircraft are known for their engineering, commonality across models and interior design. The company had 297 firm jet orders in backlog as of Sept. 31, 2022. Embraer's total backlog, including contracts from all segments, was USD17.8 billion at Sept. 30, 2022. Embraer's weaker competitive position compared with major global peers, notably The Boeing Company (BBB-/Stable) and Airbus SE (BBB+/Stable), based on scale and financial strength, is partially offset by its good business position in the niche of commercial jets with fewer than 150 seats, and its manageable financial profile. Embraer's bulk of operations are in Brazil, but its large exports flow, cash balances and operating cash flow abroad are factors supporting its ratings above the country ceiling, as per Fitch's criteria.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer
Embraer's commercial deliveries to be close to the company's guidance of 60 in 2022 and 70 in 2023 (-36% and -21% versus 2019);
The business jet market deliveries to be close to the company's guidance of 100 in 2021 and 125 in 2022 (-6% and 15% versus 2019);
EBIT margin to be around 4.6% in 2022 followed by some incremental improvements;
Embraer to generate USD480 million in FCF in 2022;
Consolidated investment expenditures of around USD250 million in 2022 and USD396 million in 2023;
Embraer to maintain its strong liquidity throughout the forecast period and active liability management strategy to manage refinancing risks.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade to investment-grade level would be dependent on a return to net leverage below 2.5x on sustainable basis, in addition to gross leverage around 4.5x and strong liquidity position with no major refinancing risks in the medium term;
Strong rebound in deliveries to 2019 levels earlier than expected leading to EBIT Margins above 7%;
Steady positive FCF generation.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Higher than expected capex levels, including additional cash outflows related to EVE;
Substantial order cancellations in the E1 and E2 programs and business jet segment, or significant delays and cost increases on the new programs;
Net leverage remaining consistently above 3.5x from end of 2023 on;
Substantial declines in liquidity without commensurate debt reductions;
Multiple-notch downgrade of Brazil's sovereign rating, along with a similar reduction in the country ceiling.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Strong Liquidity: Embraer's financial flexibility is solid and it is a key factor supporting the ratings. The company had USD3.1 billion of debt as of Sept. 30, 2022, with cross-border unsecured bonds representing 84% of this amount. Total cash and investments at the end of the period were USD1.44 billion, excluding EVE (USD 248 million), and is sufficient to support debt amortization up to at least 2025. The company has already announced the refinancing of its BNDES debt due in 2024 (around USD300 million). The company has around USD212 million of outstanding bond coming due 2023 that should be amortized. The company's liquidity is further enhanced by a revolving credit facility of USD650 million.
Fitch expects Embraer to remain disciplined with its liquidity position, maintaining its proactive approach in liability management to avoid exposure to refinancing risks. At Sept. 30, 2022, approximately 98% of the company's cash, equivalents and financial investments were in U.S. dollars and a major part being held abroad.
Issuer Profile
Embraer is the market leader for commercial jets with fewer than 150 seats. Its aircraft are known for their engineering, commonality across models, and interior design. The company delivered 48 commercial jets in 2021, an increase from 44 in 2020, but down from 89 in 2019, 90 in 2018, and 101 in 2017. Fitch expects 2022 commercial deliveries should be approximately 57 aircrafts, 30 were delivered during 4Q22.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
EMBRAER S.A. 
