Boeing Faces Potential Junk Status as Debt Hits $58 Billion

Key Takeaway

• Boeing faces potential junk status due to weak aircraft deliveries, high debt, and unclear recovery prospects, risking higher borrowing costs.
• Moody's downgraded Boeing to "Baa3" with a negative outlook; bonds yield around 6%, higher than average triple-B but lower than double-B.
• Investors remain cautiously optimistic due to Boeing's duopoly with Airbus and expect improvement in the next 6-12 months.

Boeing's Debt Rating at Risk

Boeing, a cornerstone of the U.S. defense and aerospace industry, is facing the potential downgrade of its debt rating to junk status. This development comes as the company prepares to release its May airplane delivery figures, which are anticipated to be disappointing. Rating agencies have cited weak aircraft deliveries, an unclear recovery trajectory, and prolonged high debt relative to earnings as factors that could lead to a downgrade. Boeing's total debt stands at nearly $58 billion, and a downgrade could significantly increase borrowing costs, complicating its financial strategy.

Market Reactions and Investor Concerns

Investors and analysts are closely monitoring Boeing's ability to ramp up deliveries and generate free cash flow in the second half of the year to avoid a downgrade. The company's bonds are already trading between the lower end of the investment-grade spectrum and the upper end of the high-yield market. For instance, a bond issued in 2020 and maturing in 2050 currently yields around 6.5%, while another maturing in 2030 yields just under 6%. These yields are higher than the average for triple-B rated bonds but lower than the average for double-B rated bonds, indicating market skepticism about Boeing's financial health.

"A balance sheet that size would have a lot of challenges financing itself in the high-yield market," said an asset manager holding Boeing bonds. Another portfolio manager added, "We would expect some volatility on a downgrade for sure."

Rating Agencies' Stance

Boeing's credit rating is currently at the lowest level of the investment-grade universe, with Moody's rating it "Baa3" and S&P and Fitch rating it "BBB-minus." All three agencies have also lowered their outlooks on the company to "negative," signaling a higher probability of future downgrades. Moody's analyst Jonathan Root emphasized that Boeing's ability to improve deliveries and free cash flow would be crucial in maintaining its investment-grade status. "What’s important is not the May number [of deliveries], but the trend, the slope of the line from July through December," Root said.

Fitch Ratings analyst Nicholas Varone noted that Boeing's leverage ratio makes it an "outlier" among companies with the same credit rating. The company's debt-to-EBITDA multiple is expected to fall from the "mid-teens" in 2024 to four times EBITDA by 2026. Varone added that the "lack of a pathway back" to improved production and deliveries could trigger a downgrade to junk, but he expects the company to improve over the next six to 12 months.

Street Views

• Jonathan Root, Moody's (Neutral on Boeing):

  "What’s important is not the May number [of deliveries], but the trend, the slope of the line from July through December."

• Nicholas Varone, Fitch Ratings (Cautiously Optimistic on Boeing):

  "The lack of a pathway back to improved production and deliveries, and the resulting hit to cash flow, would be one factor that could trigger a downgrade to junk. But I expect the company to improve in the next six to 12 months and that it was more likely to keep its investment-grade rating rather than lose it."

• Adam Abbas, Harris Associates (Bullish on Boeing):

  "We think there’s a pretty low likelihood that it’ll actually get downgraded... It’s a duopoly... too much negativity is built in . . . to assume that Boeing’s issues today are going to be issues in three to five years."

Management Quotes

• Brian West, CFO of Boeing:

  "[Boeing will] prioritise the investment-grade rating."