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Moody’s: Supercommittee’s Failure Is Credit Negative for Defense Contractors

Moody’s Investors Service has ranked the top 10 defense programs -- and defense contractors -- that could get hurt by an estimated $1.2 trillion in automatic budget cuts over the next decade, an estimated half of which could come from the defense industry.

The failure of the Joint Select Committee on Deficit Reduction, the Supercommittee, to put forward $1.5 trillion in deficit cuts means the triggers could take effect beginning 2013.

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The automatic cuts would come on top of Defense reductions that Congress has already passed in the Budget Control Act last August, where “the nation’s defense budget faced cuts of more than 10% over the ensuing decade, almost double the amount of previously mandated initial cuts,” Moody’s says. Those cuts come in at an estimated $492 billion over the next ten years.

Moody’s adds, however, that before the new automatic triggers automatically kick in, the markets will see yet another “period of prolonged uncertainty throughout 2012, much like this year’s continuing resolution prior to” signing the Budget Control Act “when the US seemed at risk of imminent default.”

Moody’s also notes that “defense contractors have already shown signs of the adverse effect of these various political showdowns,” including “increasing pricing pressure and delays in government awards contributing to organic sales declines in the low- to mid-single-digit percentage this year.”

And Moody’s notes that “all the more troubling is that these events have occurred before the implementation of any real cuts” and “the fallout still to be felt from rapidly declining wartime spending, particularly given the likely accelerated withdrawal of US armed forces from Iraq and Afghanistan."

Here is Moody’s ranking of the 10 defense programs facing the knife, based on the Defense Department’s 2012 budget request:

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