Boeing, a prominent player in the aviation industry for over a century, is currently facing the possibility of having its debt rating downgraded to junk status. The company is set to reveal its airplane deliveries for the month of May, which are expected to be disappointing. Factors such as weak aircraft deliveries, an uncertain recovery outlook, and high debt compared to earnings have raised concerns among rating agencies. A downgrade to junk status could make borrowing more expensive for Boeing, given its substantial debt of nearly $58 billion.
Boeing’s leadership has emphasized the importance of maintaining an investment-grade rating, and investors and analysts are hopeful that the company will be able to avoid a downgrade. The company currently sits at the lowest level of the investment-grade spectrum, with rating agencies Moody’s, S&P, and Fitch all having lowered their outlooks to “negative.” Boeing’s bonds are trading in a challenging position between investment-grade and high-yield, reflecting the existing difficulties and changes in credit ratings.
Despite the concerns surrounding Boeing’s financial situation, some investors believe that a downgrade to junk status is unlikely. The commercial aviation market, where airlines rely on Boeing and Airbus as the primary suppliers, provides stability for Boeing in the long term. The company has struggled with free cash flow this year, using nearly $4 billion in the first quarter, and is expected to have a cash outflow for the year. A ratings committee would closely consider Boeing’s deliveries and free cash flow trajectory when assessing its credit rating.
The Federal Aviation Administration has limited Boeing’s production of the 737 Max to no more than 38 per month, making it essential for Boeing to deliver near that cap to maintain its rating. Boeing’s financial struggles were further exacerbated by the grounding of the 737 Max for nearly two years after two fatal crashes in 2018 and 2019. The Covid-19 pandemic also significantly impacted Boeing’s operations, leading to multiple credit rating downgrades in 2020.
Boeing raised $25 billion in April 2020 and an additional $10 billion recently to bolster its liquidity and address upcoming maturities. The company’s leverage ratio, compared to its earnings before interest, taxes, depreciation, and amortization, is considered high, but it is expected to improve in the coming years. Fitch Ratings analyst Nicholas Varone believes that Boeing is likely to maintain its investment-grade rating in the near future, despite the challenges it currently faces.
In conclusion, while Boeing is confronting the possibility of a credit rating downgrade to junk status, investors remain optimistic about the company’s long-term prospects in the commercial aviation industry. The duopoly between Boeing and Airbus in supplying airplanes to airlines provides a degree of stability for Boeing. The company’s ability to enhance its production and deliveries, improve cash flow, and manage its debt will be critical factors in determining its credit rating outlook in the coming months.
Discussion about this post