Aerospace & Defense

A Larger Debt Offering From Boeing Might Actually Be Positive

Jon C. Ogg

It happens from time to time that even the most respectable companies find themselves with tarnished reputations. When bad reputations come to airline makers, it’s usually after tragedy has struck. In the case of The Boeing Company (NYSE: BA), the dual-tragedies of 737 MAX plane crashes in early 2019 brought some major reputation damage. The last six months have not brought much more comfort to airline passengers, regulators, nor to investors; and even ditching its CEO has not brought any instant reputation repair.

Picking a bottom in a stock like Boeing after facing the year it has faced is not very likely. After its shares traded above $445.00 a year ago, the most recent share prices under $320.00 should show that things are less than rosy. So how are investors supposed to react when they hear about a major financing package that Boeing is in need of to maintain healthy capital balances? It might actually be a good thing.

With reports of a financing package having been out in recent days, it looks like Boeing may have stronger than anticipated investor demand. According to CNBC, Boeing has commitments of more than $12 billion from bank lenders. That figure was expected to be closer to $10 billion in prior days.

It may seem off to cheer that a major corporation is taking on debt. After all, if things were so rosy the company would have been able to be paying down debt rather than adding it on. The explanation is that the lending community believes that these worries over the 737 MAX grounding will be resolved, perhaps sooner rather than later. There are just going to be discrepancies over whose definitions get used in “sooner” and in “later.”

Boeing did have some decent news over the weekend that the new 777X maiden flight this weekend was a success, Similar to the MAX efforts, this is a larger refresh of an existing plane.

Boeing is expected to report earnings this week. There is likely no reason to be excited about the report itself, and it’s going to be next to impossible for Boeing to start offering up financial guidance for a year or two years out. After all, even if the 737 MAX is re-certified and cleared for flight, it’s going to take a long time just to get the previously-flown 737 MAX models back into service. Pilots will need more training. There is said to be a shortage of simulators. And how many test pilots will it take to make sure that every one of these planes that haven’t been delivered ready for delivery again?

There is also a risk that the public will fight back for some time and not want to fly on a 737 MAX. It would not be unprecedented, and it would be hard to blame consumers for wanting to not be first aboard. Picking a wrong shirt color or buying the wrong type of food doesn’t come with the same risks of getting aboard a plane that has undergone much scrutiny.

The ripple-effect of Boeing’s 737 MAX woes has led to a halt in production as there is limited room for any new planes to be held. On top of labor issues there, this is hurting the revenues of Boeing’s various parts, components and systems providers and suppliers. It’s also adding pressure to any airline who bought and was flying 737 MAX planes prior to the grounding. It has also caused airlines to have to shuffle around their assets (the fleet and their employees) out of some routes and into others.

Should a credit rating warning matter to creditors? Just last week came a warning from Standard & Poor’s that Boeing could face a credit downgrade (A- currently) Moody’s had issued a similar warnings for its A3 rating earlier in January.

With all that considered, even with what will be a much more critical FAA re-certification and clearance, investors should take note that an up-sized bond offering is probably the start of a good sign. There can still be no assurances that bankers willing to lend more money, particularly if it puts them higher in the capital structure, will lead to a faster clearance and resolution of the deadly 737 MAX fiasco. Time will have to decide on that.

Boeing shares were last seen down 1.5% at $318.10 on Monday afternoon, but the shares traded as low as under $315.00 earlier in the day when the news headlines were all about more cases and more bad news around China’s coronvirus scare. Boeing’s 52-week range is $302.72 to $446.01 and its market cap is about $179 billion.