Ratings agency Moody's yesterday downgraded the long-term senior unsecured bonds of Rolls-Royce to junk status, saying the aviation market served by the British engineering firm has weakened and could fall further.
Moody's cut its ratings on the UK-based engine-maker's bonds by two notches to Ba2 from Baa3, meaning its bonds are now regarded as non-investment grade, and also gave the company as a whole a Ba2 rating with a negative outlook.
Shares in Rolls-Royce, which have already lost almost two-thirds of their value during the pandemic, dropped 5.7pc to trade at 253p after Moody's statement.
A Rolls-Royce spokesman called the downgrade "disappointing" but said: "None of our borrowing facilities contain covenants or credit rating triggers that demand early repayment, nor do any of our contracts with airlines. Our current financial position and liquidity remain strong."
CEO Warren East said last week the company was examining options to strengthen its balance sheet but had not made any decisions.
British media reports said Rolls-Royce was considering selling its ITP Aero division, which makes parts for the Typhoon fighter jet, to help raise cash.
Earlier in July, Rolls-Royce said it had £8.1bn (€8.87bn) at hand even after the first-half outflow.
Moody's said that it expected substantial cash outflows in 2020 and 2021 resulting in materially increased leverage, adding that the timing and extent of a recovery in long-haul flying, which drives Rolls-Royce's bottom line, was another risk, alongside the execution of the group's cost-cutting plans.
"As a result of higher than previously expected cash outflows, Moody's expects material increases in leverage, and considers that the company faces significant challenges to recover its metrics over the next two to three years," it said.
The airline industry has been badly hit by the shock to travel and tourism from the coronavirus pandemic, including Ryanair.
In April, Fitch downgraded Ryanair's rating to 'BBB' from 'BBB+', reflecting expectations for the wider aviation industry.
The agency said at the time it expected that Ryanair's revenue will not recover to the levels seen in the pre-Covid financial year until the 2023 financial year.