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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
In the third season of Breaking BadMike Ehrmentraut warns Walter White: “No more half-measures, Walter.” When you’re on a knife’s edge, you need to take decisive action.
Boeing’s management team seems to have taken that advice to heart, pulling off one of the boldest financial recovery manoeuvres in recent corporate history. On Monday, the beleaguered aerospace group went all-in with a humongous offering of shares and equity-linked instruments to shore up its balance sheet and stave off a credit rating downgrade to junk status.
This was no small ask. Market analysts had expected Boeing to tap the markets for $10bn-$15bn, but the company raised an eye-watering $24.3bn, following the exercise by the underwriters of the “greenshoe” option to increase the offering by an additional 15 per cent. Boeing has thus set a record for the largest ever US equity offering. The stock offering was priced at $143 per share, a roughly 5 per cent discount to Monday’s close — a reasonable level given the circumstances.
What’s perhaps most remarkable, though, is the market’s reaction. You’d think this level of shareholder dilution — where existing shares lose value due to a flood of new stock — would send the stock price plummeting. But Boeing’s shares took only a small hit, dropping a mere 2 per cent on the placement day. The shares have subsequently rallied to around $150, about 5 per cent above the placement price and giving the company a market capitalisation of $95bn.
Part of the reason is that investors had already baked a large equity offering into their expectations. But the market is also giving Boeing a nod of approval for this move. By raising such a massive amount, Boeing is trying to take the risk of financial distress off the table. Avoiding a ratings downgrade is crucial, as losing investment-grade status would hamper Boeing’s ability to raise debt, unsettle suppliers and customers, and potentially damage core industrial operations. It sounds paradoxical but a hugely dilutive offering can cause the stock price to re-rate upwards by alleviating concerns over financial wherewithal.
In that context, it is telling that after a strong investor response on Monday morning, Boeing decided to upsize the common stock tranche by 25 per cent instead of pushing to maximise the offer price. In other words, management prioritised putting to rest any concerns about its financial health over squeezing out the last dollar on price. Boeing wasn’t trying to drive a hard bargain, but rather was determined first and foremost to bolster its battered balance sheet — even if it meant leaving some money on the table for investors.
And Boeing’s timing also speaks volumes: this offering came right before the US presidential election and amid an unresolved machinists’ strike, signalling confidence that neither would derail its recovery plan. For Boeing there was no better time than now to start rehab. And no one wants half of the world’s duopoly in aircraft manufacturing to collapse.
An intriguing twist to the deal is the $5bn three-year “mandatory convertible” bond, a hybrid security that converts into shares on maturity. Rating agencies treat these as (mostly) equity. Boeing’s common stock pays no dividends, but the mandatory instrument yields 6 per cent, appealing to equity-linked fund managers and thus diversifying the investor pool for the deal. The positive market response enabled the underwriters to skew allocations in favour of “outright” investors keen for exposure to Boeing’s stock price over arbitrageurs, who typically profit by shorting the stock while holding the convertible. As a result, pressure on the Boeing stock price was minimised during the offering.
Boeing’s choice of equity underwriters was also strategic, aiming to foster a supportive stable of relationship banks. The four leads — Goldman Sachs, Bank of America, Citigroup and JPMorgan — had arranged a $10bn bridge credit facility earlier this month. Although US regulations prohibit banks from “tying” a loan commitment to an investment banking role, Boeing rewarded the four arrangers by granting them the equity mandate, which should yield each bank more than $75mn in fees. This contrasts with National Grid’s decision to allocate the full £140mn in underwriting fees for its £7bn share offering solely to its two corporate brokers, thereby excluding its other relationship lenders.
In short, the Boeing record-breaking offering is a recognition by the company that a fortress balance sheet is a precondition for its turnaround. The big question, of course, is whether this colossal equity deal will pay off in the long run. While not a quick fix, the capital raise represents a bold, strategic choice — and a recognition by Boeing’s management that there’s no more time for half-measures.