S&P Global Ratings placed Boeing on CreditWatch with negative implications due to the ongoing strike by its machinist union, which is now in its fourth week. This action reflects concerns about Boeing’s financial stability, given that the company may require incremental funding to meet its cash balance targets, operating needs, and upcoming debt maturities. S&P's ratings on Boeing, including the 'BBB-' issuer credit rating, senior unsecured debt ratings, and 'A-3' short-term and commercial paper ratings, could be downgraded if the strike continues and the company fails to address its financial challenges without increasing leverage.
The strike is disrupting Boeing’s plans to ramp up production, particularly the goal of reaching 38 Max aircraft per month by the end of 2024, which S&P now expects could be delayed to mid-2025. Boeing's ability to stabilize and grow its production volumes is crucial for generating free cash flow in 2025 and improving its credit metrics. The financial impact of the strike is significant, as the company is currently spending over $1 billion per month in related costs, further straining its cash flow alongside other challenges in its defense business.
S&P estimates that Boeing will face a cash outflow of around $10 billion in 2024, which is exacerbated by the strike and its plans to build working capital for increased aircraft production. With its current financial pressures, Boeing may need to seek external funding to maintain its cash reserves, cover operating expenses, and address its debt obligations, including approximately $4 billion in debt maturing in April 2025. The company has signaled a willingness to explore various options, including potentially issuing additional equity, to manage its liquidity needs.
The CreditWatch placement reflects the uncertainty surrounding Boeing's financial outlook and the ongoing negotiations with the machinist union, which could lead to prolonged production delays and higher costs. S&P aims to resolve the CreditWatch placement by the end of the year, contingent on Boeing’s ability to manage its cash flow challenges, meet its financial obligations, and effectively address the impact of the strike on its operations without increasing its financial leverage.
A downgrade by S&P of Boeing's credit rating would be significant for several reasons:
1. Increased Borrowing Costs: A lower credit rating indicates a higher risk of default, which typically leads to higher borrowing costs for the company. Investors will demand a higher yield on bonds and other debt instruments to compensate for the increased risk, making it more expensive for Boeing to raise capital.
2. Market Perception and Investor Confidence: A downgrade can negatively impact market perception and investor confidence in Boeing's financial health. It signals to investors and the broader market that Boeing's financial outlook has weakened, potentially leading to a decline in its stock price and a loss of investor trust.
3. Access to Capital: With a lower credit rating, Boeing could find it more challenging to access capital markets on favorable terms. If investors view Boeing as a higher-risk investment, they might be less willing to lend money or may demand stricter lending terms, which could limit Boeing's financial flexibility.
4. Impact on Existing Debt: A downgrade can also affect the value of Boeing's existing debt. Bond prices may fall as a result of the downgrade, leading to higher yields and greater volatility in the bond market. This could impact current investors holding Boeing's bonds, leading to potential losses.
5. Financial Strategy and Investment Plans: If Boeing's credit rating is downgraded, it might have to reconsider its strategic investments and growth plans. Higher costs of capital could force the company to delay or scale back projects, including investments in new aircraft models, technology upgrades, or expansion plans.
6. Potential for Covenant Breaches: In some cases, credit downgrades can trigger covenants in Boeing's existing debt agreements, leading to accelerated repayment demands or restrictions on further borrowing. This could further strain Boeing's cash flow and financial stability.
Overall, an S&P downgrade would increase financial pressure on Boeing, limit its options for managing its balance sheet, and signal to the market that the company's recovery efforts are at risk. This could have a cascading effect on its operational plans and future profitability.
Boeing is exploring options to raise substantial capital as it faces potential credit downgrades amid ongoing financial pressures. The company is considering issuing stock and equity-like securities to raise between $10 billion and $15 billion to maintain its investment-grade credit rating, according to sources familiar with the matter. Investment banks such as Goldman Sachs, JPMorgan, Bank of America, and Citigroup have suggested a range of fundraising options to Boeing, including common stock sales and instruments like mandatory convertible bonds and preferred equity, which are being evaluated as potential solutions to address its cash needs without significantly increasing its debt.
The urgency to raise funds has grown due to Boeing's recent operational challenges, including the ongoing machinists' strike and production issues with the 737 MAX. These hurdles have contributed to the company burning through cash at a rate of over $1 billion per month, leading to a cash outflow of approximately $10 billion for 2024, as estimated by S&P Global Ratings. Boeing’s existing debt load stands at about $60 billion, with $11.5 billion of debt maturing by early 2026 and commitments tied to acquisitions that further strain its balance sheet. Moody’s has already put Boeing's Baa3 rating on review for a downgrade to junk if it deems any equity raise inadequate, highlighting the precarious nature of Boeing’s financial situation.
Maintaining its investment-grade credit rating is crucial for Boeing as it influences not only the cost of borrowing but also its ability to attract institutional investors who typically prefer investment-grade securities. The company has historically managed to keep its rating above junk status, but analysts now estimate that Boeing needs to raise at least $12 billion to $15 billion to avoid slipping into non-investment grade territory.
While issuing common stock is seen as the most favorable option from a credit standpoint, S&P’s aerospace director Ben Tsocanos expressed reservations about other funding methods like preferred stock with required payments, viewing them as less supportive of Boeing’s credit rating.
As Boeing continues to evaluate these financing options, the company’s ability to raise the necessary capital will be closely watched by the market, as it could significantly impact its financial stability and future operations. A downgrade to junk status would not only elevate Boeing's borrowing costs but also signal to investors that the company's financial risks have increased, potentially limiting its access to favorable capital markets in the future.