Boeing, a manufacturing pioneer, linchpin of the US defence business and survivor of a century of turbulence in the aviation industry, is facing a once-unthinkable prospect: having its debt rating cut to junk. The aerospace giant is scheduled to detail its aeroplane deliveries for the month of May on Tuesday. The figures are expected to be a disappointment, and investors and analysts will be watching to see if the company can crank up deliveries — and free cash flow — in the second half of the year in the hope of avoiding a downgrade.
Weak aircraft deliveries, an unclear recovery picture and a prolonged period of high debt relative to earnings have been cited by rating agencies as factors that could lead to them cutting Boeing’s rating to junk.
A drop to junk status could make it more expensive for Boeing to borrow. The sheer size of its capital structure, with nearly US$58 billion ($94.9b) in overall debt, may prove difficult for high-yield buyers to digest a rush of new supply easily - sparking price swings. Boeing’s leadership has stressed the importance of maintaining investment-grade status, and investors and analysts expect the company to avoid a downgrade if at all possible.
“A balance sheet that size would have a lot of challenges financing itself in the high-yield market”, making it “a really difficult transition to high-yield”, said one asset manager who holds Boeing bonds. “We would expect some volatility on a downgrade, for sure,” said another portfolio manager at a big asset manager which holds Boeing bonds.
The aerospace giant is hovering at the lowest level of the investment-grade universe after Moody’s joined the other top rating agencies in reducing its credit quality to “Baa3″ in April - known as “BBB-minus” by its peers. At the same time, Moody’s, S&P and Fitch all lowered their outlooks on the company to “negative” - a move that can signal a higher probability of additional future downgrades.