Moody’s May Cut Defense Contractor Ratings
August 11, 2011
Moody's Investors Service Inc. may cut its ratings on some defense contractors because of expected defense spending budget cuts that it says could total a half-trillion dollars or more.
Defense contractors will face significant pressures from potential cuts of as much as 10 percent or more to the nation's defense budget, and Moody's warns that both large prime contractors and smaller manufacturers will be affected over the next 10 years.
"Pressure on earnings and cash flow could eventually lead to ratings downgrades for some contractors, particularly those still dealing with substantially underfunded pension programs," said Russell Solomon, a Moody's senior vice president.
A report from Moody's Wednesday said with industry margins already under pressure and at a modest average of just 10 percent, increased competition in a less robust market will put even more pressure on profits for defense contractors. Moody's predicts that companies will reduce their payrolls and undertake other restructuring as specific program cuts are identified.