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Announcement:

Moody's confirmation of EADS highlights governments' role as odd rescuers

Global Credit Research - 12 Mar 2007
Moody's confirmation of EADS highlights governments' role as odd rescuers

London, 12 March 2007 -- The confirmation on March 9 of the A1 long-term debt rating of European Aeronautic Defence and Space Co. EADS ("EADS") and Moody's Investor Service's decision to increase the weight of potential support by European governments factored into the rating highlights the ambiguous nature of government interference in the case of Airbus.

The intrinsic credit strength of EADS had been seen as flagging, as a result notably of the announcement of expected delays in the production of its A380 aircraft and increased competitive pressure. Today, the rating (A1) was kept unchanged.

"This decision highlights the odd nature of government interference in the case of Airbus: a 'poisonous' source of complication for the management to quote Mr Gallois, EADS co-chief executive, but a helping hand in times of financial difficulties," says Pierre Cailleteau, Chief International Economic and Financial Policy Analyst.

"The governance of the company is notoriously tortuous, and management at EADS requires an inordinate level of diplomacy, which cannot but distract from more conventional business objectives," adds Mr Cailleteau.

Even the way governments make their influence felt is convoluted, through more or less reluctant private shareholders (Lagardere and Daimler). The French government is a shareholder of EADS through a partnership with Lagardere in which it appears via a holding company. The German government is not even a shareholder.

However, today's decision by Moody's to increase the level of support factored in the rating is also unusual. Levels of support factored into ratings are generally very stable, at least when the levels of participation in the companies' capital do not change. In the case of EADS, Moody's has raised the level of potential support from medium-high to high to reflect the accumulation of indices that Airbus is perceived as economically, socially and politically critical for a wide range of stakeholders.

While Moody's did not ignore the flagship nature of the company and its importance to the French and German economies, the rating agency had pondered these elements with the commercial nature of the company and the risk of escalating WTO-arbitrated frictions with Boeing.

"The almost unanimous view in France that Airbus should be supported and the range of options considered -- including nationalisation -- have convinced Moody's that any French government would go to great lengths to commit public money if and when necessary," says Mr Cailleteau. "We believe that such a high level of concern goes beyond electoral posturing and reflects an entrenched inclination for state protection and a low appetite for exposing private bond holders to losses."

The fact that the most pro-market of the leading Presidential candidates pledged to do for EADS what had been done for the fully private company Alstom a few years ago -- that is, bail it out -- leads Moody's to believe that the new support level is solidly justified.

As a result, the potential support embedded into EADS's rating is now on par with those of EDF or Thales, companies that are "almost sanctuarised for the foreseeable future from a credit standpoint".

"In these circumstances, it is highly unlikely that the French and German governments will agree soon on a modus operandi where governments will take a back seat -- let alone take no seat at all," says Mr Cailleteau. "Even though it seems odd that a company, which is supposed to embody a European post-national project, triggers such bouts of economic patriotism, it would have been illusory to believe that this heralds the start of an era of 'sovereign' indifference."

London
Pierre Cailleteau
Senior Vice President
Credit Policy Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Frederic Drevon
Senior Managing Director
Moody's EMEA
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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