Fitch puts Embraer on watch

Fitch Ratings said it placed Embraer SA's long-term foreign- and local-currency issuer default rating of BBB- and national scale rating of AAA(bra) on Rating Watch negative.

Fitch also said it placed Embraer's unsecured bonds on Rating Watch positive.

The action follows news that Embraer has received approval from the government of Brazil to proceed with the previously announced agreement with the Boeing Co. to create a joint venture in the commercial aviation sector, as well as a joint venture for Embraer's KC-390 military transport aircraft operations, the agency said.

The Brazilian government announced that it will not exercise the veto power granted by its golden share, allowing the transaction to move forward, Fitch explained.

The closing of the transaction is still subject to Embraer's shareholder and regulatory approvals and customary closing conditions, the agency noted.

The companies expect the transaction to close by the end of 2019.

The negative watch reflects an expectation that the ratings on the post-deal company may be lower as a result of a weaker business profile due to the concentration of its operations in the defense and executive jet segments, Fitch said.

The watch also considers the company's significant client concentration, along with challenges in improving profitability and operating cash flow, the agency said. The positive watch on Embraer's unsecured bonds reflects the expectation that the bonds will migrate to the commercial aviation joint venture, Fitch said, and the likelihood that the 80% ownership by Boeing will enhance the bonds' credit profile.

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