Boeing Considers Raising Debt as MAX Crisis Takes Toll
January 06 2020 - 6:29AM
Dow Jones News
By Doug Cameron
Boeing Co. is considering plans to raise more debt to bolster
finances strained by the grounding of its 737 MAX, according to
people familiar with the matter.
The aerospace giant isn't running out of cash. Boeing had about
$20 billion in available funds at the end of the September quarter,
according to the company's financial statements. But costs
associated with the MAX crisis are rising.
Boeing faces compensation claims from airlines and families of
the 346 victims of two MAX crashes over the past 15 months. This
month, Boeing halted production of the plane, lowering some costs
but pushing back the likely date at which payments for finished
planes would resume.
Analysts expect Boeing to raise as much as $5 billion in
additional debt to help cover expenditures that could top $15
billion in the first half of this year. In addition to spending on
maintenance for the MAX's stalled production facilities and
finished planes, the company plans to close its $4 billion
acquisition of an 80% stake in the Brazilian plane maker Embraer
SA's commercial airliner business. Boeing also has to repay some
existing debt and fund shareholder dividends.
Chief Financial Officer Greg Smith said in October, when Boeing
last provided guidance related to the MAX return to service, that
the company didn't expect to have to resort to certain unspecified
"levers" to improve its finances. Mr. Smith is also serving as
interim chief executive until David Calhoun takes over on Jan.
13.
Now, alongside raising more debt, Boeing is also thinking of
deferring some capital expenditures, freezing acquisitions and
cutting spending on research and development to preserve cash,
people familiar with those possibilities said.
Demand for investment-grade corporate bonds in the U.S. remains
favorable after market volume last year fell short of 2018 levels
in part because of relatively sluggish merger activity outside a
few big deals, analysts said.
Boeing last tapped bond markets in July, with a $5.5 billion
multiyear issuance that was almost two times oversubscribed. Boeing
secured pricing little changed from offerings in February and
April. Those issuances came on either side of the MAX's global
grounding in March after the second fatal crash, which involved an
aircraft operated by Ethiopian Airlines.
Since July, Boeing's credit rating was downgraded one notch by
Moody's Investors Service and S&P Global. The bond issuance and
liquidity squeeze pushed the company's debt-to-equity ratio to
around 9.6 by the end of 2019, compared with 2 at the end of 2018,
according to debt specialists CreditSights.
"They can probably raise money pretty easily, it's just going to
cost them a little more," said Eric Bernardini, co-leader of the
global aerospace, defense and airlines practice at consultant
AlixPartners.
Boeing's search for funding would likely trigger fresh
disclosures for investors about the MAX fallout. Boeing would be
required to make assumptions on the timeline along which regulators
might return the MAX to service. That could include a revised
schedule for resuming production of the aircraft as well as
estimates of compensation and higher production costs.
Analysts expect Boeing to raise its forecast compensation for
MAX customers when the company reports quarterly results on Jan.
29. Boeing has so far earmarked $6.1 billion through a mix of cash,
discounts and in-kind benefits for customers.
Mr. Smith has also pledged support for suppliers. Many said they
were caught off guard when the company said last month that it
would suspend MAX production indefinitely and stop receiving parts
from suppliers in mid-January.
Spirit AeroSystems Holdings Inc., the largest MAX supplier, has
halted production of its parts for the plane. Others such as
Wichita, Kan.-based HM Dunn AeroSystems have said they would avoid
layoffs by switching workers to make parts for Airbus SE jetliners
and military aircraft.
Bankers focused on the aerospace industry said they are watching
the impact of the MAX crisis on the long-term value of that
aircraft to the company. Some said Boeing's finance arm might have
to rent some planes or provide guarantees to back loans to airlines
that have lost money on canceled flights and had to pay to secure
alternative jets while the MAX is grounded.
Some aerospace bankers said deal making in the sector was likely
to remain on hold until the MAX is cleared to fly, a benchmark that
would provide more clarity on Boeing's production plans. Boeing had
been on its own mergers-and-acquisitions tear over the past two
years with deals focused on expanding its services and
venture-capital arms. The company has disclosed only two small
deals since the grounding and sold a jet parts business.
Write to Doug Cameron at doug.cameron@wsj.com
(END) Dow Jones Newswires
January 06, 2020 06:14 ET (11:14 GMT)
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