European Aeronautic Defence & Space Co. EADS -- Moody's affirms EADS' A1 rating following France's sovereign downgrade; stable outlook

New York, November 20, 2012 -- Moody's Investors Service has today affirmed the A1 long-term debt ratings for European Aeronautic Defence & Space Co. EADS ("EADS" or "the company"). Despite its recent decision to change the sovereign rating for the government of France to Aa1 (negative) from Aaa (negative), as announced on 19 November 2012, Moody's has affirmed EADS' long-term debt ratings because it has raised the company's fundamental underlying baseline credit assessment (BCA) to a3 from baa1. Moody's has raised EADS' BCA to reflect its expectation that the company will demonstrate ongoing positive operating momentum and an improving credit profile over the forward 18- to 24-month rating horizon. The outlook for the ratings remains stable.

The higher BCA -- a measure of the company's fundamental standalone credit profile in the absence of any support from its government owners -- primarily reflects Moody's belief that (1) EADS will be able to successfully execute on its planned increases in commercial production rates, and thereby convert its substantial backlog into higher levels of aircraft deliveries and cash flows over the next 12-24 months, (2) problems related to multiple developmental programs have mostly been addressed, and (3) the company's resulting key credit metrics will subsequently be bolstered further by the improving profitability and cash flow profile over the extended rating horizon.

At two notches of lift above the revised BCA of a3, the A1 long-term debt ratings for EADS are also now more solidly positioned within the rating category, reflecting the assumptions of ongoing implicit strong support from and low default dependence with the government of France under Moody's government-related issuers (GRI) methodology.

RATINGS RATIONALE

The ratings broadly reflect (1) EADS' strong market position as a leader in aircraft production (airplanes, helicopters), with a sizeable and growing asset base; (2) the long-term revenue visibility associated with the company's very large backlog of orders, totaling nearly EUR550 billion (albeit at list vs. contractual selling prices); and (3) the financial flexibility afforded to EADS by its sizeable net cash position and strong overall liquidity profile. The ratings continue to be constrained, nonetheless, by the company's weak operating margins and asset returns, along with moderate business diversification and some ensuing risk related to its future governance and strategic objectives.

Moreover, in accordance with Moody's GRI rating methodology, the ratings also incorporate the combination of the following inputs: (1) the company's a3 BCA; (2) the Aa1 local currency rating (negative outlook) for the government of France (the supporting government of EADS, with a stake of approximately 15%); and (3) Moody's assessment that EADS has "low" default dependence with the French government and benefits from "strong" implicit support from the French government.

In particular, Moody's anticipates that EADS' A380 and A400M programs will be less cash absorptive going forward. Although these programs will likely continue to consume capital -- especially the A380, which has an issue with cracks appearing in the wing ribbing and for which EADS expects to incur incremental charges approximating EUR260 million in 2012 -- the company's cash requirements are expected to be much lower than in previous years. In addition, the company's A350XWB development program -- delayed by another three months, with entry-into-service now scheduled for the third quarter of 2014 -- will require considerable investment as production ramps up over the coming years. Taken together, these large cash outflows, coupled with normal course volatility in order rates and associated pre-delivery payments, could render EADS free cash flow negative for the year and slow the company's anticipated growth and full free cash flow generating ability over the near term.

However, Moody's expects EADS to be able to more than offset these constraining factors with the strong cash flows that the company is likely to generate from its older, in-production commercial aircraft programs (A320, A330). The production rates for these programs have either recently ramped up (A320, to a record high 42/month during the fourth quarter of 2012) or are scheduled to do so (A330, to 10/month by April 2013, and possibly 11/month by 2014). Development costs for the A320neo (the fastest-selling plane in Airbus' history, with expected entry-into-service during the second half of 2015) should be manageable and fully accommodated within EADS' financial profile.

Moody's believes EADS will be able to successfully execute on its scheduled commercial production ramp-ups and convert its substantial backlog into higher levels of aircraft deliveries and cash flows over the next 12- to 24-months, a key factor underpinning the higher BCA. This expectation is despite the rating agency's concerns regarding supply-chain management and further potential disruption therein, along with some ongoing risk related to the availability of aircraft financing and requisite international capital markets development.

Moody's notes that several of EADS' key credit metrics are already greatly improved from last year, particularly its debt/EBITDA, which now stands at around 2.0x, and its retained cash flow/debt, which approximates 44%. Moreover, Moody's anticipates that EADS will achieve further improvements in most of its quantitative credit metrics over the --next two years. The rating agency considers that EADS will make slow progress towards achieving operating margins that are more comparable to those of peers (i.e., high single-digit levels). However, any future upward migration of the company's long-term ratings will be dependent on it achieving such margins.

WHAT COULD CHANGE THE RATING UP/DOWN

Although Moody's does not consider a rating upgrade to be likely over the extended rating horizon, the rating agency could upgrade EADS' rating if the company evidenced measured operating performance improvements such that, on a sustained basis, it demonstrated (1) high single-digit operating margins (now at around 4%), (2) debt/EBITDA of less than 1.5x, and (3) meaningful free cash flow generation while continuing to deliver on its new programs and maintaining a strong liquidity profile.

Conversely, negative rating pressure could arise as a result of (1) a reversal of recent favorable trends and an accompanying deterioration in EADS' operating profitability, and/or (2) a lack of steady progress by the company towards achieving operating margins at least in the mid-single digits in percentage terms. Negative rating pressure could also result if (1) there was an acceleration in aircraft cancellations that significantly curtailed EADS' sizeable backlog, and/or (2) the company experienced further production problems with any of its large programs and a strong liquidity profile was not maintained.

PRINCIPAL METHODOLOGY

The principal methodology used in rating EADS was Moody's Global Aerospace and Defense Industry Methodology published in June 2010. Other methodologies used include the Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Toulouse, France, EADS is a leading aerospace company through its principal Airbus operating subsidiary (approximately two-thirds of revenue and growing), which is one of only two global producers of large commercial airplanes (Boeing, A2 stable, being the other). Eurocopter (the world's largest helicopter maker), Cassidian (defence and security) and Astrium (military telecommunications and ballistic missiles) provide some diversification, although EADS is principally exposed to the commercial aviation cycle. EADS had turnover of approximately EUR54 billion during the 12-month period ended September 2012.

REGULATORY DISCLOSURES

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Russell Solomon Senior Vice President Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Michael J. Mulvaney MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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