Boeing is facing a critical juncture, with its financial health being scrutinized as labor tensions escalate. Both Moody’s Ratings and Fitch have expressed serious concerns about the company’s future, particularly regarding a machinists’ strike, which threatens to disrupt Boeing’s already fragile cash flow. The aerospace giant, already grappling with production issues, is now staring down the possibility of having its credit rating downgraded to junk status.
The situation is dire for Boeing, as its current Baa3 rating from Moody’s is already perched at the lowest rung of investment grade. A downgrade would plunge the company’s rating into speculative-grade or “junk” territory, which could have significant repercussions for its borrowing capabilities. At a time when Boeing is working to stabilize itself after numerous production missteps, this potential downgrade would be a serious blow to its turnaround efforts.
Experts have noted that a downgrade would not only increase borrowing costs but also limit Boeing’s access to certain investors, particularly pension funds, which are often restricted to holding investment-grade bonds. This could severely shrink the pool of potential buyers for Boeing’s debt, further complicating its financial recovery. With approximately $45 billion in outstanding debt, Boeing can ill afford to face additional hurdles in accessing capital markets.
Moody’s has stated that its review will focus on the duration of the strike and the impact it will have on Boeing’s cash flow. There is also the looming possibility that the company may need to raise equity to shore up its liquidity. Such a move could dilute current shareholders, adding another layer of complexity to the company’s financial strategy.
The strike by machinists comes at a particularly precarious time for Boeing, as the company is still working to ramp up production of its key aircraft models, including the 737 and 787. Production of these models has been slow due to earlier setbacks, including supply chain disruptions and regulatory hurdles. Any further delays caused by the strike could derail Boeing’s plans to increase production rates and improve its operating cash flow, both of which are critical to its recovery.
Industry professionals have pointed out that Boeing’s defense division is also a source of concern, as the company is still grappling with the costs associated with fixed-price contracts. These contracts have been a financial drain, and their impact on earnings and operating cash flow remains significant. Any prolonged disruption in the commercial airplane business could exacerbate these challenges.
Fitch Ratings has echoed Moody’s concerns, noting that while the current strike may not immediately affect Boeing’s rating, an extended strike could have far-reaching financial and operational consequences. Fitch’s assessment suggests that Boeing’s rating has little room for error, meaning even a short disruption could tip the scales toward a downgrade.
Financial analysts are watching the situation closely, particularly given Boeing’s substantial debt load and the looming refinancing deadlines. The company has a significant portion of its debt maturing in 2025 and 2026, and any downgrade to junk status could complicate efforts to refinance or roll over these obligations. The bonds issued in May, which include coupon step-up features, are particularly noteworthy. These bonds will see an increase in coupon payments if Boeing’s credit is downgraded, potentially raising the company’s cost of servicing its debt.
At a recent analyst conference, Boeing’s Chief Financial Officer emphasized the company’s commitment to maintaining its investment-grade credit rating. However, the market remains skeptical, particularly given the financial strain Boeing has experienced in recent years. Production slowdowns, coupled with the impact of the COVID-19 pandemic, have left the company in a precarious position.
Adding to the complexity is Boeing’s recent production rate for its 737 MAX aircraft. While the company has reportedly increased production to around 30 units per month in July and August, this remains well below the U.S. Federal Aviation Administration’s cap of 38 units per month. Any further disruptions, particularly due to the strike, could delay Boeing’s ability to meet production targets, further straining cash flow.
The financial toll of the strike is difficult to calculate, but past events provide some context. Moody’s has pointed out that a 57-day strike by the International Association of Machinists (IAM) in 2008 cost Boeing approximately $1.5 billion per month, or roughly $50 million per day. At that time, Boeing’s production rates were similar to current levels, but the company’s cost base has since increased, meaning the financial impact of a strike today could be even more severe.
As of now, Boeing’s stock has already felt the effects of these concerns, dropping significantly in recent months. Year-to-date, the stock is down nearly 40%, a stark contrast to the broader market, where the S&P 500 has gained 18%. Investors appear to be bracing for more bad news, particularly if the strike drags on and leads to further disruptions in Boeing’s production schedules.
Bondholders, meanwhile, have taken a somewhat defensive stance. Early in the trading session on Friday, there was notable interest in Boeing’s outstanding bonds, with many investors snapping up notes in strong volumes. However, as the day progressed, some sellers emerged, particularly in longer-dated notes. These bonds are seen as riskier, particularly if Boeing’s credit rating is downgraded.
The aerospace company remains in a delicate position, trying to balance operational challenges, labor disputes, and the need to protect its credit rating. Should the strike continue, Boeing may be forced to make tough decisions regarding its capital structure, potentially raising equity or further tightening its belt to preserve liquidity. The stakes are high, and the outcome will not only impact Boeing’s financial future but could also have broader implications for the aerospace industry as a whole.
