Howmet Aerospace
UK engineered metal products
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Steel and building products
Worthington industries
Moving up within HY
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US office property company
Office Properties Income Trust
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Belgian/German high voltage transmission grid operator
Elia Group
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US office property company
Vornado Realty
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US and UK pharmacy chain
Walgreens Boots Alliance
New fallen angels3
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Airline operator
United Airlines
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French satellite operator
Eutelsat
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Data storage provider
Western Digital
Moving deeper into HY
Now rated:
Ba2 S/BBB- NO/NR
Cut two notches by Moody's in December 2023
The company is the second largest pharmacy chain in the US and the largest in the UK: as such it has a strong business profile. Walgreens’s multi-year settlement for opioid litigation is largely agreed, but we will continue to monitor developments closely. Progress has been made in integrating acquisitions and turning around the company’s health-care operations. It has solid liquidity and, having suspended share repurchases, is committed to reducing its debt burden. The reduction could be accelerated if talk of selling the Boots business proves to be true.
LOIM's longer-term view
The company’s debt levels remained high following a number of acquisitions. Weaker than expected profitability – from lower demand for COVID vaccines and testing, and larger than expected losses from its new US health-care business – made leverage metrics incommensurate with an investment grade rating.
Ratings rationale
Walgreens Boots Alliance
Now rated:
Ba1 S
Cut one notch by Moody's in December 2023
The company benefits from a long operating history and a well-diversified tenant base. Vornado’s lease maturity profile is well-spread and valuable. It holds an unencumbered asset base concentrated primarily in New York (which generates 85% of net operating income) and in San Francisco. It has a strong liquidity position.
LOIM's longer-term view
The downgrade reflected:
The company’s high leverage
A difficult leasing environment for US office space
Challenging financing conditions
Ratings rationale
Vornado Realty
LOIM's longer-term view
Ratings rationale
Now rated:
Ba1 S
Cut one notch by Moody's in December 2023
The company benefits from a long operating history and a well-diversified tenant base. Vornado’s lease maturity profile is well-spread and valuable. It holds an unencumbered asset base concentrated primarily in New York (which generates 85% of net operating income) and in San Francisco. It has a strong liquidity position.
The downgrade reflected:
The company’s high leverage
A difficult leasing environment for US office space
Challenging financing conditions
Vornado Realty
The hybrid bond issue
was cut by a notch to
BB+ and entered the
fallen-angel universe
Senior rating was cut by
one notch at S&P to BBB
in December 2023
Elia benefits from a largely regulated business and, therefore, predictable cashflows. It is likely to be able to obtain equity support to maintain its senior rating at BBB, which means the hybrid should remain stable at BB+.
LOIM's longer-term view
The company announced a doubling of its capital expenditure programme to around EUR 30 billion through to 2028.
This will need to be funded, at least partially, through debt and will lead to a deterioration in credit metrics.
Ratings rationale
Elia Group
Now rated:
Ba1 S
Cut one notch by Moody's in December 2023
The company benefits from a long operating history and a well-diversified tenant base. Vornado’s lease maturity profile is well-spread and valuable. It holds an unencumbered asset base concentrated primarily in New York (which generates 85% of net operating income) and in San Francisco. It has a strong liquidity position.
LOIM's longer-term view
The downgrade reflected:
The company’s high leverage
A difficult leasing environment for US office space
Challenging financing conditions
Ratings rationale
Vornado Realty
LOIM's longer-term view
Ratings rationale
Elia Group
Now rated:
Ba2 NW/BB- NW/BB+ NW
Cut two notches by Moody’s and one notch by Fitch in November 2023
While both the Flash and HDD businesses are starting to recover from deep cyclical lows, recent erosion in credit metrics and continued uncertainty about capital structure and financial policies could lead to further pressure on ratings and consequent widening of spreads. While we believe that the risk of default is low, we believe there is a potential for further rating action which is not reflected in the bond issue’s price.
LOIM's longer-term view
Remains on review for downgrade on all three agencies.
The ratings actions followed the conclusion of company's strategic review and Q3 2023 announcement that it will split into two listed businesses: a tax-free spin-off of its Flash (solid-state drives) and HDD (hard disk rives) businesses.
The HDD operation will trade under the WDC ticker where the bonds will remain, while Flash will have a separate capital structure consistent with its growth and volatility profile.
Ratings rationale
Western Digital
Now rated:
Ba2 S/BBB- NO/NR
Cut two notches by Moody's in December 2023
The company is the second largest pharmacy chain in the US and the largest in the UK: as such it has a strong business profile. Walgreens’s multi-year settlement for opioid litigation is largely agreed, but we will continue to monitor developments closely. Progress has been made in integrating acquisitions and turning around the company’s health-care operations. It has solid liquidity and, having suspended share repurchases, is committed to reducing its debt burden. The reduction could be accelerated if talk of selling the Boots business proves to be true.
LOIM's longer-term view
The company’s debt levels remained high following a number of acquisitions. Weaker than expected profitability – from lower demand for COVID vaccines and testing, and larger than expected losses from its new US health-care business – made leverage metrics incommensurate with an investment grade rating.
Ratings rationale
Walgreens Boots Alliance
Now rated:
Ba2 NO/BB- S/BB S
Secured bonds cut from BBB- to BB- by S&P in October 2023
We understand the strategic sense behind the merger but execution risk is high and it may be some time before the benefits of the deal are realised.
LOIM's longer-term view
The company completed its merger with UK rival OneWeb to create the first integrated GEO/LEO (geostationary equatorial and low earth orbit) player.
The downgrade reflected the anticipated increase in leverage from around 3.5x to 4.5x in 2025, as the company ramps up investment in the network.
There are also risks linked to the increasingly competitive market and nascent LEO market.
Ratings rationale
Eutelsat (ETLFP)
LOIM's longer-term view
Ratings rationale
Western Digital
Now rated:
Ba1 S/NR/BBB- NO
Bond UAL 3.1% 10/07/28 was cut one notch by Moody's in October 2023
While we are comfortable with the underlying issuing entity, we note the downgraded bond is small (less than USD 200 million), was issued in 2016 and is illiquid.
LOIM's longer-term view
The downgrade followed a review of 32 series of Enhanced Equipment Trust Certificates (EETC). EETCs are essentially structured secured bonds issued by airlines, with the rating determined by a clear framework.
The downgrade was driven by a deterioration in the loan-to-value metric.
Ratings rationale
United Airlines
LOIM's longer-term view
Ratings rationale
Eutelsat
Now rated:
Ba1 S/BBB- S/BBB- S
Cut two notches by Moody's in October 2023
The separation is largely offset, in our view, by the stability of the joint venture earnings and dividends and the strong liquidity and financial metrics of the remaining entity.
The bond was issued in 2017, there is only USD 200 mn outstanding and it is illiquid.
LOIM's longer-term view
The move follows the separation of Worthington Steel, which reduces the scale and diversity of the business and leaves the issuer more dependent on joint venture earnings.
Ratings rationale
Worthington Industries
LOIM's longer-term view
Ratings rationale
United Airlines
Left the fallen-angel universe in December 2023
Absent a renegotiation of the bank line, probably to a secured structure, and concrete proposals to refinance bonds maturing in 2024 and 2025, some form of debt restructuring is likely.
Our initial review identified our concerns when the issuer became a fallen angel.
LOIM's longer-term view
Despite operational performance being reasonably robust, the company did not refinance its USD 700 mn bank line, which was due in January 2024, and was drawn to USD 200 mn. The downgrades were driven by management’s failure to address these liquidity concerns coupled with an unclear strategy and financial policy.
Ratings rationale
Office Properties Income Trust
LOIM's longer-term view
Ratings rationale
Worthington Industries
Now rated:
Ba1 PO/BBB- S/BBB S
Upgraded one notch by S&P in December 2023
Expected to stabilise at mid-to-low BBB going forward.
LOIM's longer-term view
Profitability has improved due to continued strong demand for commercial aerospace components. The company’s supportive financial policy further aided a strengthening of credit metrics.
Ratings rationale
Howmet Aerospace
LOIM's longer-term view
Ratings rationale
Office Properties
Senior rating was cut by
one notch at S&P to BBB
in December 2023
Downgraded to Ba1 by Moody’s in November 2022 and sequentially to Caa1 over the next 12 months.
Downgraded two notches to BB by S&P in March 2023 followed by further down-grades over the next six months to CCC+
Left the fallen-angel universe in December 2023
New fallen angels3
Now rated:
Caa1 NO/CCC+ NW/NR