Friday was another bad day for Boeing Co. All of the company’s credit ratings were put on review by Moody’s Ratings for a possible drop because of worries about how a strike by machinists would affect the company’s cash flow.
The rating of Baa3 is already the lowest level of investment grade. If it were to go down even further, it would be in speculative-grade, or “junk” land right away.
That would make it harder for Boeing to borrow money at a time when it is trying to fix its production problems by fixing itself. Also, a lot more buyers, like pension funds, who can only buy investment-grade debt would not be able to buy the bonds.
Moody’s said it would look at how long the strike lasts, how it affects cash flow, and what Boeing BA -3.69% might need to do to raise more money.
An official statement from the rating agency said, “We will also look at how the strike and ongoing problems with making more 737 and 787 planes affect the timing of production rate growth and the speed and size of improvements in Boeing’s operating cash flow.”
A look at how much it costs the business to carry out fixed-price contracts in the defence sector is also planned. These contracts continue to eat away at profits and cash flow.
Fitch Ratings said in a separate statement that the company’s rating “has limited headroom for a strike.”
“The current strike is not likely to put pressure on the rating if it lasts a week or two,” Fitch said. “However, a long strike could have a big effect on operations and finances, which would raise the risk of a downgrade.”
Both Fitch and S&P Global Ratings put Boeing at the very bottom of the investment grade scale. The business owes $45 billion.
Boeing’s Chief Financial Officer, Brian West, was quoted as saying at an analyst meeting on Friday that the company is committed to protecting its balance sheet and is looking at its capital structure to make sure it can make the next few months’ worth of debt payments.
A source told Bloomberg that West said, “We remain committed to managing the balance sheet prudently.” “The investment grade credit rating is the most important to us.”
The commercial aeroplanes business is still in its early stages of recovery, but Moody’s said that a long strike would slow it down.
“We think the number of 737 MAX narrow-body planes being made rose to about 30 a month in July and August.” This is in line with the U.S. Federal Aviation Administration’s (FAA) limit of 38 737s per month, the statement said.
Moody’s said it is hard to figure out how much the strike costs Boeing every day. It said that the 57-day strike by IAM members in 2008 cost the company about $1.5 billion a month, or $50 million a day. At that time, the company was making 34 737s a month, which is its standard rate.
According to Moody’s, the cost base for the commercial aeroplanes section was also lower than it is now.
Even though the news came out on a day when Boeing stock was going down, investors quickly changed their minds and bought up a lot of outstanding notes.
The following charts from BondCliQ Media Services, a company that provides data solutions, show that spreads stayed the same from Thursday to Friday because bonds were bought on net.
By early afternoon, some sellers had emerged, as the yellow arrow illustrates, although spreads barely budged given thin trading volumes on a Friday afternoon.
Again, investors were playing it safe by selling some notes with longer terms and buying newer bonds that will pay more if the aerospace company’s credit is lowered.
Analyst Carol Levenson of GimmeCredit wrote earlier this week that Boeing is “bleeding cash, clinging to investment grade ratings by a fingernail, and struggling to increase production after [the Federal Aviation Administration] mandated slowdown to improve its quality processes (after the embarrassing exploding door plug incident”).
When May bonds were sold, they had coupon step-up features that added 25 basis points to the coupon for every possible downgrade notch. Moody’s and S&P Global Ratings would get rid of the credit rating, and people who own those bonds would get an extra 50 basis points of yield.
Boeing’s maturity stack shows the bulk of its bonds come due in 2026, although it also has $4.3 billion to refinance in 2025.
The stock, meanwhile, is down 40% in the year to date, while the S&P 500 SPX0.54% has gained 18%.
