Embraer Netherlands Finance BV — Moody’s affirms Embraer’s Ba2 ratings; changes outlook to stable from negative

Rating Action: Moody’s affirms Embraer’s Ba2 ratings; changes outlook to stable from negativeGlobal Credit Research – 03 Feb 2022New York, February 03, 2022 — Moody’s Investors Service (« Moody’s ») has today affirmed Embraer S.A. (Embraer)’s Ba2 corporate family rating and senior unsecured debt rating, and the Ba2 ratings of the senior unsecured notes issued by Embraer Overseas Limited and Embraer Netherlands Finance BV and guaranteed by Embraer. The outlook for all ratings was changed to stable from negative. Ratings affirmed: Issuer: Embraer S.A. Corporate Family Rating: Ba2$500 million global senior notes due 2022: Ba2Issuer: Embraer Netherlands Finance BV$1,000 million Gtd global senior notes due 2025 guaranteed by Embraer S.A.: Ba2Issuer: Embraer Overseas Limited$540.52 million Gtd global senior notes due 2023 guaranteed by Embraer S.A.: Ba2 Outlook actions: Issuer: Embraer S.A. Outlook changed to Stable from NegativeIssuer: Embraer Netherlands Finance BVOutlook changed to Stable from NegativeIssuer: Embraer Overseas LimitedOutlook changed to Stable from NegativeRATINGS RATIONALEThe change in Embraer’s rating outlook to stable from negative reflects (i) the ongoing improvement in credit metrics related to a gradual recovery in market conditions, operating performance and backlog, and (ii) the improvement in the company’s liquidity position following the recent asset sale in Portugal, the initiatives to reduce cash burn and the business combination and subsequent IPO of the eVTOL business EVE Holding, Inc. (EVE), all of which mitigates the risks that could trigger a negative rating action in the short term.Moody’s expects that Embraer’s adjusted gross leverage will decline to 7x-6x by year-end 2022 and to 6x-5x in 2023, from around 9x in 2021 and 19.1x in 2020, when credit metrics were hurt by lower deliveries related to the pandemic and the additional debt raised by the company to cover cash needs. The recovery will come on the back of higher deliveries of aircrafts in the commercial segment, firm demand for services and support agreements, executive jets, and higher profitability in the defense and security business with the beginning of commercialization of the KC-390 aircraft. Despite potential volatility in existing contracts with the Brazilian government, Embraer’s backlog will continue to grow with additional orders in the commercial aviation segment, as illustrated by the recently announced agreement with Azorra for up to 50 E190-E2 or E195-E2 aircrafts worth $3.9 billion based on list prices, of which $1.6 billion is firmly committed.The company’s liquidity profile will also improve with proceeds from asset sales and the expected inflow related to the business combination of EVE in 2022, which will help to reduce net leverage ratios to below 3x in 2022-23, from around 4x in 2021. Embraer’s cash flows will also benefit from its strategy to reduce cash burn through efficiency gains, such as better inventory management, reduction in the production cycle of aircraft by more than 35% by 2022, and the optimization of investments to respond to market the conditions, as illustrated by the postponement of the 175-E2 jet entrance to 2024 from 2022 because of the pilot contract scope clause limitations in the United States.Such milestones will help abate liquidity risks coming from the capital intensity of its business and the development costs of the new eVTOLs business and investments needed to comply with new service agreements — which require less employed capital than the jet business –, freeing up cash for debt reduction and a faster recovery in gross leverage ratios. Lower cash needs will also support the maintenance of adequate net leverage ratios during the volatile recovery in the company’s commercial aircraft business.Embraer’s Ba2 rating continue to reflect its solid position as a leading regional jet maker and its reputation as a reliable airplane producer, bolstered by its good liquidity derived from large cash balances and a manageable debt maturity profile. The Ba2 rating also takes into consideration the fact that funding from Brazilian public banks would be available, if needed. In Moody’s view, Embraer is still a strategic asset to the Government of Brazil (Ba2 stable), which owns a golden share in Embraer with veto rights.At the same time, the cyclical nature of the aviation business and increasing competition constrain Embraer’s rating, particularly given the significant investments required on an ongoing basis to keep up with evolving customer needs. The company’s high financial leverage coming from working capital pressure and high investments, exacerbated by significant earnings and cash flow erosion during the pandemic, is an additional rating constraint that is partially mitigated by adequate net leverage ratios. Embraer’s financial performance and balance sheet were severely hit by the impact of the coronavirus pandemic on demand for new commercial and business aircraft in 2020, with a more sustained recovery likely only in 2022-23.LIQUIDITYEmbraer’s good liquidity is an important factor underpinning its rating. The company has consistently maintained a high cash balance, matching the level of its outstanding debt, except in 2020, when net leverage increased because of the additional debt raised during the pandemic and the cash burn posted during the crisis. As of the end of September 2021, the company’s cash on hand and short-term investments of BRL13.3 billion were enough to cover all its debt maturities through 2024. Moody’s expects Embraer to continue to proactively pursue liability management initiatives to lengthen its debt tenor and reduce debt cost, thus preserving its liquidity profile.RATING OUTLOOKThe stable outlook reflects Moody’s expectations that Embraer’s credit metrics will continue to recover through 2023 and that the company will maintain its good liquidity to mitigate risks related to the volatility in market conditions.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSUpward rating pressure is unlikely until Embraer’s credit metrics and free cash flow generation recovers sustainably from the pandemic slump. Quantitively, an upgrade would require positive free cash flow generation on a sustained basis, and net leverage ratios strengthening to pre-pandemic levels of around 2-3x. The maintenance of a strong liquidity profile and of conservative financial policies would also be required for an upgrade.Expectations of deeper and longer declines in demand for new aircraft as a result of the pandemic, particularly if not matched by additional sources of liquidity, could result in a rating downgrade. A downgrade could also result from wider liquidity concerns, for instance because of cost inflexibility, or from clear expectations that the company will not be able to maintain financial metrics compatible with a Ba2 rating following the pandemic with gross adjusted leverage above 5x and retained cash flow/net debt below 15% on a sustained basis.The principal methodology used in these ratings was Aerospace and Defense published in October 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287887. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEEmbraer is a leading manufacturer of commercial jets with up to 150 seats, with a growing defense and security segment, and a line of business jets, including new types for the medium-sized and super-medium-sized segments. Founded in 1969 by the Brazilian federal government and privatized in 1994, Embraer is headquartered in São Jose dos Campos, Brazil. In the 12 months that ended September 2021, the company reported net revenue of BRL25.2 billion ($4.6 billion) with an adjusted EBITDA margin of 10.8%.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Carolina Chimenti Vice President – Senior Analyst Corporate Finance Group Moody’s America Latina Ltda. 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