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Boeing at Risk of Junk Rating With S&P Amid Strike
(Bloomberg) -- S&P Global Ratings is looking at downgrading Boeing Co.’s credit grades to junk, citing the planemaker’s growing cash needs as it suffers from a strike by machinists that looks increasingly likely to wear on.
The credit grader estimated that Boeing will burn through about $10 billion of cash in 2024. The company is likely to require additional funding to meet its day-to-day cash needs and finance debt maturities, according to a statement from the ratings firm on Tuesday. Boeing is considering raising at least $10 billion by selling shares, Bloomberg reported earlier this month, as it tries to maintain investment-grade credit ratings.
Negotiations in recent days have collapsed between Boeing and one of its employees’ unions, the International Association of Machinists and Aerospace Workers, with each side blaming the other.
“The strike puts Boeing’s recovery at risk,” according to S&P. “We believe the company remains exposed to higher-than-expected cash usage and adjusted debt for the next year or two.”
Boeing’s bonds extended their weakening on Wednesday, with risk premiums on the company’s 6.528% bonds due May 2034 widening 0.04 percentage point to 1.74 percentage point above benchmark yields, according to Trace. That spread is more in line with average levels on BB rated debt that sits just below investment-grade.
Junk-rated companies usually face higher borrowing costs than their investment-grade counterparts. Boeing has about $4 billion of debt coming due in 2025 and also $8 billion coming due in 2026, according to Moody’s Ratings, which said last month that it’s considering downgrading Boeing to junk. The company had about $58 billion of short- and long-term debt outstanding as of the end of June, according to data compiled by Bloomberg.
Boeing has been plagued by manufacturing problems for years, and has lost money on an annual basis since 2019. This year it has faced additional pressure, most recently from a strike by 33,000 hourly factory workers that’s shut down its manufacturing across the Pacific Northwest. That walkout is costing Boeing more than $1 billion a month, even with a slew of cost-saving measures that it’s put in place, S&P said in the report.
The ratings firm doesn’t expect Boeing to reach its target of producing 38 of its 737 Max jets per month until mid-2025, months after the year-end goal set by company executives.
S&P still expects Boeing to generate positive free cash flow next year, but cautioned its estimates “are increasingly sensitive to elevated costs associated with the work stoppage.”
A spokesperson for Boeing declined to comment.
Even one downgrade can boost a company’s borrowing costs, but two or more often make it ineligible for inclusion in the biggest high-grade corporate bond indexes, forcing many investors to sell their bonds. That usually dramatically boosts a company’s future funding expenses.
Fitch Ratings, the third of the three biggest ratings firm, said last month that a prolonged striked could increase the risk of the company’s being downgraded to junk. Fitch didn’t say in September that it’s actively considering a downgrade.
Financial Pressure
Boeing has faced growing financial pressure after a door-size panel blew off an airborne 737 Max 9 in early January, a near-catastrophe that brought greater scrutiny by US regulators. The company was forced to slow down production of its 737 Max, its biggest cash generator, and other commercial aircraft as it worked to improve its manufacturing processes. The strike has brought production of Boeing’s cash-cow Max jetliner to a standstill for more than three weeks.
But the company’s financial strain is years in the making. In October 2018, a brand-new 737 Max 8 jet, flown by Indonesia’s Lion Air, plunged into the Java Sea. In March 2019, a second 737 Max crashed, this time in Ethiopia. The two failures killed some 346 people. Governments worldwide began grounding the jet, one of the company’s biggest sources of sales.
The pandemic, which slowed travel globally and brought many airlines to the brink of collapse, didn’t help, with the company posting a net loss of nearly $12 billion in 2020.
The losses piled up even after US and European regulators cleared the 737 Max for flying again in 2020 and 2021. Boeing’s sales recovered slowly after the crashes, while its expenses stayed high.
If the strike continues toward the end of the year, a credit rating downgrade is more likely, according to S&P. S&P currently rates the company at BBB-, the lowest investment-grade level.
Boeing is working with advisers to explore its options for raising capital, Bloomberg reported earlier this month. Reuters reported that banks have pitched the company on selling common stock as well as other related instruments, such as preferred equity and mandatory convertible securities, that can be treated as equity-like by ratings firms.
The machinists’ walkout that began last month was the company’s first major strike in 16 years.
(Updates with bond movement, detail on the company’s borrowings from fifth paragraph. An earlier version of this story corrected the name of the ratings firm in first paragraph)