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Boeing seeks financial flexibility as Max crisis drags

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Via Financial Times

The 737 Max crisis has taken a toll on Boeing’s financial health, torching cash, prompting credit rating downgrades and forcing the plane maker to seek a new $10bn loan.

But while Boeing announced in April that it would pause share buybacks, new chief executive David Calhoun said on Wednesday the board never discussed halting a dividend that last year paid $3.9bn. Boeing “will stay on that path unless something dramatic changes”.

The aerospace manufacturer will this week provide more detail on the financial trade-offs it may have to make after the worldwide grounding of the Max transformed the company’s workhorse jet from a growth driver to a cash sink.

Boeing’s finances are at “some point between a bad case of the flu and a heart attack — in an otherwise healthy person able to recover”, said analyst Craig Fraser at Fitch Ratings, the credit rating agency, which downgraded Boeing’s investment-grade debt this month.

The company’s defence and services businesses retained healthy revenues, margins and cash flows, he pointed out. “Once the cash drain to the Max ends, the entire company will be pulling in the same direction again.”

But how soon? Analysts placed the cost of the grounding between $15bn and $20bn before Boeing said a week ago that the Max would remain earthbound until mid-year. Each month of extra delay costs the company about $1.5bn, said Bank of America Merrill Lynch analyst Ron Epstein. Some analysts think Mr Calhoun is setting a conservative timetable to avoid repeating the overly optimistic predictions that led to the ouster of his predecessor, Dennis Muilenburg.

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But Fitch estimates the company’s debt nearly doubled last year to approximately $27bn. The company’s free cash flow collapsed as Boeing continued to make planes even as it was barred from delivering them to customers. Free cash flow went from $11.1bn in the first nine months of 2018 to a $1.6bn outflow for the same period a year later. The company stopped production this month. 

Column chart of Free cash flow ($bn) showing Boeing is burning cash

Wall Street banks chip in

Boeing is working with its bankers to secure a new $10bn loan that would help fortify its balance sheet, according to multiple people briefed on the matter, and has received commitments from several large lenders including Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and Morgan Stanley.

As the company continues to work with regulators on the changes needed before the Max can be certified safe to fly, the loan has been structured to give Boeing plenty of flexibility.

It is a delayed-draw loan with a two-year maturity, which would give Boeing access to the funds at a future date, according to one of the people briefed. The largest banks that have committed to the financing are expected to contribute roughly $1.5bn to $1.6bn each to fund the loan package. 

Mr Fraser said the loan could be used to cover Boeing’s ongoing cash burn in the first quarter, to repay an approximately $1bn maturing debt or to refinance commercial paper debt that has grown more expensive as Boeing’s credit profile has worsened.

Boeing also has a $4.2bn cash payment coming up for the acquisition of Brazilian jet maker Embraer’s commercial aircraft business — a deal it had hoped to close by May — although European regulators requested additional information last week which likely will delay the transaction’s closing date. 

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The effort to secure the new loan comes just months after Boeing increased its revolving credit facility with its lenders to $9.6bn. Bank of America, Boeing, Citi, JPMorgan, Wells Fargo and Morgan Stanley declined to comment.

Column chart of Cash returns to shareholders ($bn) showing Boeing has halted buybacks but maintained its dividend

Boeing retains a solidly investment-grade credit rating despite the downgrades by Fitch and the two biggest rating agencies S&P Global and Moody’s.

But S&P warned last week that a second downgrade could be coming and that it was reviewing the A-minus rating it gave Boeing just last month. It could cut the rating if its analysts believe the “Max grounding had weakened Boeing’s competitive position such as by permanently damaging its reputation with customers and regulators”, it said.

‘Bank of Commercial’ is closed for now

Chief financial officer Greg Smith said last year that Boeing had “a lot of levers” to pull to maintain financial flexibility.

That might include delaying capital expenditures, Mr Fraser said, adding: “I sense there’s a general level of belt-tightening.”

Another possibility is that Boeing bids less aggressively for defence work, said analyst Richard Aboulafia of the Teal Group. The strength of the company’s commercial aircraft business historically allowed it to undercut competitors and win contracts such as the US Air Force T-X advanced jet trainer, MH-139 missile field-support helicopter and the US Navy MQ-25 aerial refuelling drone. With the Max crisis causing a big cash burn, Boeing’s defence arm cannot rely on “the Bank of Commercial” to cover upfront losses on big contracts, Mr Aboulafia said.

Share buybacks are likely to remain off the table through 2020 and possibly 2021, Mr Fraser said. Boeing bought back $43bn of its stock between 2013 and the first quarter of 2019, shrinking the number of outstanding shares by 25 per cent. Critics have charged that the company was more interested in providing shareholder returns than sinking profits into engineering.

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Boeing will report quarterly earnings on Wednesday. Cowen analyst Cai von Rumohr wrote in a January 22 note that the now-extended timetable to return the Max to service will hurt those earnings in two ways.

Boeing has already taken a more than $5bn charge for payments it will owe to airlines for delayed delivery of the Max and Cowen had forecast Boeing would raise customer compensation reserves by $6bn. Meanwhile, the stated costs of producing the Max were expected to swell by $4bn.

Both of those estimates, Mr von Rumohr wrote, now look low.

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