Fitch also worries that machinists' strike could lead to a downgrade
Boeing Co. took another blow Friday, when Moody's Ratings placed all of the aerospace giant's credit ratings on review for a possible downgrade, on concerns about the impact of a strike by machinists on the company's cash flow.
The rating of Baa3 is already the lowest rung of investment grade, meaning a downgrade would immediately lower it into speculative-grade, or "junk" territory.
That would in turn hamper Boeing's ability to borrow money at a time it is trying to turn itself around following a series of production missteps. It would also shut the bonds out from a much bigger pool of investors, including pension funds, that can only own investment-grade debt.
Moody's said it would assess the strike's duration and impact on cash flow and the potential equity raising Boeing (BA) will need to do to bolster its liquidity.
"We will also assess the extent to which the strike and ongoing challenges in increasing production of the 737 and 787 aircraft models affect the timing of growth in production rates and the pace and scale of improvements in Boeing's operating cash flow," the ratings agency said in a statement.
It will also review the costs for the company to complete the fixed-price contracts in the defense business, which will continue to be a drain on earnings and operating cash flow.
Separately, Fitch Ratings said the company's rating "has limited headroom for a strike.
"If the current strike lasts a week or two, it is unlikely to pressure the rating," said Fitch. "However, an extended strike could have a meaningful operational and financial impact, increasing the risk of a downgrade."
Fitch and S&P Global Ratings also have Boeing at the lowest rung of investment grade. The company has $45 billion in debt.
At an analyst conference on Friday, Boeing Chief Financial Officer Brian West was quoted as saying that the company is committed to supporting its balance sheet and is evaluating its capital structure to make sure it can make coming debt payments over the next few months.
"We remain committed to manage the balance sheet prudently," West said, according to Bloomberg. "We want to prioritize the investment grade credit rating."
Moody's said a prolonged strike would disrupt the recovery of the commercial airplanes business, which is still in the early stages.
"We believe production of the 737 MAX narrow-body increased to near 30 a month for July and August. This compares to the U.S. Federal Aviation Administration's (FAA) 737 production cap of 38 a month (cap)," said the statement.
Calculating the daily cost of the strike to Boeing is complicated, said Moody's. It noted the IAM member 57-day strike in 2008 cost the company about $1.5 billion a month, or $50 million a day, at a time when 737 production was at its then normal production rate of about 34 a month.
"Additionally, the cost base of the commercial airplanes segment was lower compared to today's cost base," said Moody's.
The news came on a day when Boeing stock was lower, but bondholders were taking the opposite tack early in the session, snapping up the outstanding notes in strong volume.
Spreads were unchanged from Thursday amid net buying of the bonds, as the following charts from data-solutions provider BondCliQ Media Services show.
By early afternoon, some sellers had emerged, as the yellow arrow illustrates, although spreads barely budged given thin trading volumes on a Friday afternoon.
Investors were again taking a defensive position by selling certain longer-dated notes and buying more recently issued bonds that will pay more if the aerospace company's credit is downgraded.
GimmeCredit analyst Carol Levenson wrote earlier this week that Boeing is "bleeding cash, clinging to investment grade ratings by a fingernail, and struggling to increase production after [a Federal Aviation Administration] mandated slowdown to improve its quality processes (after the exploding door plug embarrassment)."
Bonds that were issued in May came with built-in coupon step-up features that add 25 basis points to the coupon for each notch of a potential downgrade. If Moody's and S&P Global Ratings downgrade the credit, holders of those bonds would receive an extra 50 basis points of coupon.
Boeing's maturity stack shows the bulk of its bonds come due in 2026, although it also has $4.3 billion to refinance in 2025.
The stock, meanwhile, is down 40% in the year to date, while the S&P 500 SPX has gained 18%.
For more: Boeing's stock drops as workers strike, and history suggests it could fall more
-Ciara Linnane
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