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)'/Outlook Stable.
Fitch has also affirmed the 'BB+' unsecured notes of Embraer Netherlands Finance BV. The Rating Outlook for the IDRs is revised to Positive from Stable.
The Positive Outlook reflects Embraer's improving production and delivery profile and growing operating cash flow generation that should benefit credit metrics. Fitch recognizes that recent supplier issues have postponed further improvement in deliveries, but expects ongoing progress to lead to operational normalization throughout 2024. Fitch forecasts Embraer's consolidated total leverage to trend down to 4.0x by 2024, with net leverage just around 1.0x.
Embraer's ratings reflect its competitive positions in the commercial and business jet markets; backlog of USD17.8 billion, and product portfolio diversification that includes defense programs and solid operations in its services and support segment. Embraer's robust liquidity, mostly held outside Brazil, and its large export revenue, combined with some offshore operating cash flow, further support its ratings.
Key Rating Drivers
Ongoing Backlog and Deliveries Rebound: Fitch expects commercial aircraft deliveries to lag below 2019 levels by 28% in 2023, 12% in 2024 and stable in 2025. Commercial deliveries should be around the low end of FY2023 guidance (65-70) and 78 aircraft deliveries during 2024. For business jet deliveries, the rebound has been faster; deliveries are expected to increase 6% in 2023 and 27% in 2024, with deliveries around 115 and 138, respectively. In 2022 and 2023, Embraer and the broader global aerospace and defense industry suffered from materials shortages and supply chain constraints, which affected deliveries targets. Fitch expects this to improve in 2024, which should support the ongoing rebound in deliveries.
Embraer's firm order backlog (commercial aviation) stood at 291 aircraft at the end of 3Q23, up from 281 in 4Q20 but still below 338 in 2019, before the pandemic. Its financial backlog has already surpassed pre-pandemic levels, with USD17.8 billion at the end of 3Q23, higher than 2019 and an improvement from USD14.4 billion at YE 2020. In Fitch's view, Embraer's backlog supports production for the next several years but suffers from concentration. Embraer continues to work to boost orders of its E2 aircraft, while remaining active in the sale of E1 for regional airlines in the U.S. The growing operations with the E2 in Europe and Canada could also support better opportunities in the main lines in the U.S. as well.
Strong Market Position: Embraer's strong market position for commercial jets with fewer than 150 seats and within the global executive jets industry 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 continue to look to rightsize their fleets to adjust capacity. The weaker financial or business positions of a few competitors, or in some cases changes in strategy, enable growth opportunities for Embraer that are helping the company see deliveries rebounding in 2023-2024.
Improving Diversification: Embraer has been efficient in improving its business diversification after several years of investing in new projects, such as E2 family, KC-390 and on its service and support operations. The expansion of the service& support segment, better product mix in both commercial aviation and executive jets and improving scenario for Defense are likely to benefit Embraer's business profile in the medium term. Embraer's revenue during the first nine months of 2023 operates were distributed as 33% of commercial aviation, 24% executive jets, 10% Defense & Security, 32% Service & Support and 1% others. Embraer is also developing its Evtol operation through its subsidiary Eve Inc. (89.5% share ownership).
EBIT Margin Recovering: Embraer's operating performance is expected to improve as deliveries rebound (gains of scale) and well as from past quarter of cost structure improvements. Fitch projects Embraer's EBIT margins will recover to around 5.4% in 2023 and continue to expand in 2024 and 2025 towards 7%, with the likely increase in backlog. Before the pandemic, the company faced challenges as it navigated several new development programs. Lower deliveries in commercial aviation and less favorable mix affected Embraer's fixed cost dilution in 2020-2022.
FCF Expansion Limited by Eve and Inventories Normalization: After a strong working capital inflow during 2021-2023 (average USD302 million) mostly monetization of inventories and pre-delivery deposits (PDPs), Embraer's operating cash flow will start to be consumed by working capital consumption ahead of deliveries volume ramp-up, ongoing capex programs and developments at Eve. The strong FCF during 2022 represented an improvement from the USD1 billion of FCF burn in 2020 and positive FCF of USD239 million in 2021. For 2023 and 2024, FCF is expected to be around USD120 million and USD173 million, including Eve and before any asset sale. For Eve, Fitch estimates around USD100 million of operating expenses and capex of around USD15 million, USD60 million and USD25 million in 2024, 2025 and 2026 related to the construction of its plant facility. For 2023-2024, Fitch's rating case does not currently assume dividend distributions.
Net Leverage Trending Down: Fitch forecasts Embraer's net debt/EBITDA to reach 1.5x in 2023, down from 2.4x in 2022 and 4.3x in 2021. 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, around 5.8x, with positive trends to decline to 4.0x and 3.0x by 2024 and 2025. The company's ability to maintain positive FCF generation, to reduce gross leverage, while maintaining 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 291 firm jet orders in backlog as of Sept. 30, 2023. Embraer's total backlog, including contracts from all segments, was USD17.8 billion at Sept. 30, 2023. Embraer's weaker competitive position compared with major global peers, notably Airbus SE (A-/Stable) and The Boeing Company (BBB-/Positive) 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
Embraer's commercial deliveries to be close to the low-end of the company's guidance of 65-70 in 2023 and 78 in 2024 (-28% and -12% versus 2019);
The business jet market deliveries to be around 115 in 2023 and 138 in 2024;
EBIT margin of 5.3% in 2023 and moving around 7% during 2024-2025;
Consolidated investment expenditures of USD287 million in 2023 and USD332 million in 2024;
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 below 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%;
Solid expansion of E2 portfolio;
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;
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.
Liquidity and Debt Structure
Strong Liquidity: Embraer's financial flexibility is solid and it is a key factor supporting the ratings. The company had USD2.9 billion of debt as of Sept. 30, 2023, with cross-border unsecured bonds representing 61% of this amount. Cash position at the end of the period were USD1.3 billion, excluding Eve (USD256 million), and is sufficient to support debt amortization up to at least 2026 (USD166 million). During 2023, the company completed a refinancing and improved its debt schedule amortization. Embraer also increased its exposure to BNDES, with debt increasing to around USD612 million from average of USD305 million during 2021-2022, and this should increase in the next few years and BNDES should finance Eve's production plant (USD150 million). The company's liquidity is further enhanced by a USD650 million revolving credit facility.
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, 2023, 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 a 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 also manufactures executive jets, and Defense & Security aviation segment.
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
EMBRAER S.A. 
