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A company whose credit rating falls from investment grade to junk status is known as a “fallen angel”. Boeing’s descent into the high-yield netherworld is drawing ever closer. Stalled jet deliveries along with a recent work stoppage by thousands of machinists will send cash flow even deeper into the red.
Yet, despite its parade of operational and financial troubles, Boeing still boasts a backlog of 5,400 planes worth $437bn. And that should be enough for equity investors to bite on an increasingly anticipated share offering of perhaps $10bn.
Boeing management is trying to convince Wall Street that it is merely a matter of time until its cash machine is turned on again. The company’s flagship 737 narrow body programme — paralysed by regulatory investigations over safety — was just starting to ramp up again prior to the workers’ strike. Separate production problems with the 777 and 787 have arisen. Adding to the nightmare, Boeing’s aerospace defence business is also flailing at the moment (its problems include two astronauts trapped in space).
But the planes waiting to be assembled and delivered are spoken for. The question for now is to have enough cash on hand for working capital needs, until deliveries can be made and paid for. Boeing says it likes to have around $10bn in cash on hand. As of the last quarter, after a $10bn bond issuance, cash was up to $13bn, against $58bn of total debt.
Boeing says it will defend its investment grade status — ever more imperilled after Moody’s last week put it on watch for a downgrade. Analysts at CreditSights research firm calculate incremental $400mn of interest expense from certain Boeing bonds that reset their coupon on a downgrade. In the secondary market, many mutual funds that hold high grade debt would be forced to sell Boeing securities if they no longer were appropriately rated.
The implication is that Boeing will choose to sell equity as the way to shore up liquidity to avoid credit market chaos. That choice, however, would be a painful one. Shares are 65 per cent off their 2019 peak. A $10bn offering — what Boeing’s cash burn rate and balance sheet preferences suggest would be a credible size — would imply selling a little more than a tenth of the company, an absolute and relative size not often seen in capital markets.
The case against Boeing is that its multiple operational problems will persist despite the company’s insistence that better days are just around the corner. Still, the order book is full, suggesting a staying power that should prove tempting to bet on.