The Boeing Company, after announcing intentions in its earnings call, has secured an additional $25 billion in debt to provide the cash cushion it needs to survive the SARS-Cv-2 crisis. But since the company’s credit rating has been cut to BBB- it appears that debt rates have risen. Vertical Research Partners reported that one 10 year tranche was to be priced at 5.15%. The deal consists of seven tranches with maturities ranging from 3 to 40 years.
This new debt will remove doubts about Boeing’s liquidity in the near term and eliminates the need for the company to be bailed out by the US government. Such a government bailout would likely have come with restrictions, potential stock warrants, and requirements to keep employees on the payroll. The management team at Boeing that announced layoffs of 10% of the workforce, or 16,000 employees, is now free to execute its plans without consequences, except, of course, the costs of losing key skills that the company may need in the future.
The result of all of this additional debt means Boeing will likely not be able to provide any returns to its shareholders in the near term and will need to spend cash to deleverage its ugly debt ratios rather than to invest in new products. While Boeing can survive in the near-term, it is mortgaging its future to maintain its independence from the government. The bankers now fundamentally own Boeing.
The new levels of debt at Boeing are unprecedented in the industry and could become an impediment to growth in the future. Boeing has already canceled the new middle-market airplane, after examining the situation for several years, but will need to focus on the future small aircraft to replace the 737 before 2030. Since new development programs take about 8 years from their inception to delivery these days, the timing couldn’t be worse for Boeing to take on additional debt that could impinge on its product development budgets.
Politics has played a role in these events. The Trump administration, like them or don’t, in its airline bailout packages, did ensure employment levels and provided more sophisticated analyses than the industry expected as it crafted its bailout plans. The handwriting was on the wall that had Boeing accepted a Federal bailout, warrants would be required to provide the government an opportunity to recoup its losses, and that employment reductions would not be allowed. While both Republicans and Democrats would likely support those restrictions, Boeing clearly wants to control its own destiny. But given its recent track record, should it?
We wonder if the market has gone totally insane. While Boeing claims that its access to the capital markets demonstrates it’s soundness and thereby doesn’t need a rescue, the issue of whether it will need a government bailout has just been punted forward for a short time. Let’s look at just a few of the facts:
- The company is hemorrhaging money and is now rated just above junk at BBB-;
- Boeing faces massive legal actions over the flawed 737 MAX and Boeing’s compromise of safety for profits;
- The MAX aircraft still hasn’t returned to the air, as additional safety issues keep being discovered and it is unlikely to fly again before the 4th quarter at best;
- The quality of the MAX 737 assembly line is now the subject of a federal investigation, as materials were left in the fuel tanks of new aircraft and safety issues apparently ignored;
- Boeing has lost its production certificate for the MAX and must certify each new aircraft it produces until it re-earns its qualification;
- The 787 line has quality problems with tools left inside airplanes, including a ladder in the tail section of one airplane delivered to a customer (it rattled);
- The 777X is running late, and is the wrong aircraft at the wrong time for the industry;
- The KC-46 tanker still doesn’t meet requirements, and Boeing has taken another write-off;
- Boeing just canceled the merger deal with Embraer that would have provided it access to an engineering team that delivered 14 new products on-time and on-budget in 14 years;
- Boeing just announced a layoff of 16,000 employees across the company;
- Orders for new aircraft are negative as cancellations outpace sales by a wide margin;
- The overhang of nearly 800 MAX airplanes will cause a dramatic oversupply in the narrow-body aircraft market;
- Boeing’s ability to build and sell new narrow-body aircraft, the major generator of cash flow, will be severely impaired for several years.
On top of this add a management team that hid a key safety system from both the FAA and airlines to avoid the need for simulator training (and a $1 million per aircraft penalty clause with Southwest) that resulted in 346 lives being lost, a management team that spent $43 billion on stock buybacks rather than investing in new programs and lost all of it, and a new CEO that has been on the board and a part of the problem for 10 years. One could certainly say that a Moral Hazard exists here. If there ever was a candidate to be a Harvard Business School case study, this is it.
But the market loves Boeing for one reason – it is a cornerstone of the Military-Industrial Complex and is viewed as too big to fail. Their view is that the government can’t afford to lose a company that contributes most of our balance in trade and employed (until this week) 160,000 people. Eventually, there will need to be a bailout.
Our view is to let it fail. Boeing deserves a Chapter 11 after the mismanagement of its aircraft development programs, misleading the FAA and hiding systems from airlines and pilots, putting profits above safety resulting in 346 unnecessary deaths, and failing to manage the quality of its aircraft at multiple facilities. Today, Boeing is the company that can’t shoot straight, no matter how many rounds of ammo it is given.
The sad part is that Boeing was the company that brought in the jet age, made air travel affordable for the masses, and at one time built great airplanes. Maybe a Phoenix could rise from its ashes.