Morningstar is lowering its credit rating on BAE Systems (BA.) by one notch to BBB+ from A- based on our updated forecast of lower defence spending and upward trending leverage. BAE's position as the largest defence contractor in the United Kingdom gives it stellar government support and confirms its narrow-moat status. BAE also benefits relative to its peers by having one of the better geographic mixes of revenue, with about 50% from the United States and around 20% from other international markets such as Saudi Arabia and India, in addition to the U.K. and Europe (30%). This supports our Business Risk rating. In addition, BAE is poised to benefit from the ramp-up of the F-35 programme. However, BAE does face significant competition across the majority of the rest of its non-U.K. business. We also note that the firm's U.S. exposure in particular subjects it to the significant spending cuts likely resulting from the Budget Control Act of 2011 and subsequent sequestration.
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