Moody’s considers a number of items when assigning credit ratings for the global aerospace and defense industry, including quantitative measures of three broad factors: size and scale; business profile, revenue sustainability, and efficiency; and financial leverage and flexibility. A company’s ratings for each of these factors are weighted and aggregated in determining the overall credit rating assigned. The broad factors, the sub-factors, and weightings are as follows:

1. What are some reasons why Moody’s may have selected these three broad factors as being important in assigning a credit rating in the aerospace and defense industry?

2. Why might financial leverage and flexibility be weighted so heavily?

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Broad Factor Size and scale Business profile, revenue sustainability, and efficiency Sub-Factors Total revenue Operating profit Expected business profile (e.g., prime contractor versus easily replaced small supplier) Revenue visibility (backlog/revenue) Revenue protection (competitive factors; e.g., barriers to entry) EBITA/Average assets Sub-Factor Weighting (%) 10 15 10 5 5 5 Broad Factor Weighting (%) 25 25