Boeing’s BA-N credit rating faced pressure for a second time this week as S&P brought the company one step closer to a junk rating on Thursday after a January mid-air blowout of a cabin panel led the planemaker to slow production of its best-selling jet.
The rating agency changed its outlook on the company’s bottom of investment grade rating to “negative” from “stable” to reflect an increased potential for Boeing to face further delays in the expected recovery of its cash flow and credit ratios.
S&P, which affirmed Boeing’s “BBB-” long- and “A-3″ short-term issuer credit ratings, expects the company will not generate enough free cash flow in 2024 to cover looming debt maturities and has flagged concerns over leadership uncertainty after CEO Dave Calhoun said he would leave by year’s end.
On Wednesday, Moody’s cut Boeing’s credit rating to one notch above junk status just hours after the company reported it used $3.93 billion of free cash flow in the first quarter.
“This rating change with negative watch just adds to the long list of pressures that Boeing is grappling with,” said Rob Stallard, analyst at Vertical Research Partners, referring to the Moody’s downgrade.
The planemaker has been under heavy regulatory scrutiny, and has lowered production of its 787 widebody, along with its 737 MAX, after the cabin panel blew off an Alaska Airlines 737 MAX 9 flight in mid-air, forcing an emergency landing.
But investors and analysts told Reuters that Boeing is in a position to solve its quality and supply-chain problems and increase production to generate needed cash flow before a more serious downgrade. The planemaker could also tap bond markets to get ahead of more than $12 billion in combined debt coming due in 2025 and 2026.
Tony Bancroft, portfolio manager at Gabelli Funds which owns shares in Boeing, said the rating agencies might cause some near-term volatility but make a limited impact in the long-term.
“I think the general understanding is if they’re able to generate the cash flow, by being able to improve deliveries in the back half of the year with the 737 and 787, they have a pathway to do that.”
Risks include supply-chain snags, problems with the 787, or the possibility of the Federal Aviation Administration identifying more issues.
“I think it depends upon on how they’re able to perform,” Bancroft said.
One portfolio manager of a fund that holds Boeing stock said he thinks the planemaker has one to two years to improve production levels to generate needed cash before the risk of a downgrade to junk status.
Indeed, even with the threat of a downgrade to junk, credit spreads, or the premium over Treasuries paid by Boeing on its bonds, have not widened dramatically in the last few days, said Matt Woodruff, analyst at CreditSights. Some bonds were quoting about 5-10 basis points wider since last Friday, he added.
Woodruff said bond investors are not reacting too negatively partly because of the perception that Boeing “will bounce back eventually.”
One pressure point cited by Moody’s on Wednesday is that annual free cash flow would fall short of the looming maturities.
Woodruff, like others, expects Boeing to tap the bond markets to raise $5 billion-$10 billion in new bonds to address its near-term cash-flow challenges.
“It would make sense for them to capitalize on the current high level of demand for fixed income and tap the more liquid investment-grade investor base to raise capital,” he said.
On Wednesday, Boeing’s chief financial officer, Brian West, told analysts the company has “significant market access” and is continuously evaluating opportunities if it decides to supplement its “liquidity position.”
Boeing referred to additional remarks by West, who said the planemaker is “committed to managing the balance sheet in a prudent manner.”