Updates from Boeing Co
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The 737 Max crisis took its toll on Boeing’s financial health, burning cash, causing credit rating downgrades and forcing the aircraft maker to apply for a new $ 10 billion loan.
But as Boeing announced in April that it would halt share buybacks, new chief executive David Calhoun said last week that the board had never discussed halting a dividend that had paid out $ 3.9 billion last year. Boeing “will stay on this path unless something dramatic changes.”
The aerospace maker will provide more details this week on the financial tradeoffs it may have to make after the Max’s global downtime transformed the company’s work plane from an engine of growth to a well of Treasury.
Boeing’s finances are “at some point between a severe case of the flu and a heart attack – in an otherwise healthy person who is able to recover,” analyst Craig Fraser of Fitch Ratings said. rating, which downgraded Boeing’s quality debt this month. month.
The company’s defense and services business maintained healthy revenues, margins and cash flow, he said. “Once the leak of funds to the Max is over, the whole company will be pulling in the same direction again. “
But in how long? Analysts put the cost of the downtime at between $ 15 billion and $ 20 billion before Boeing announced a week ago that the Max would remain onshore until mid-year. Each additional month of delay costs the company about $ 1.5 billion, said Ron Epstein, analyst at Bank of America Merrill Lynch. Some analysts believe Mr Calhoun is setting a cautious timetable to avoid repeating the overly optimistic predictions that led to the ousting of his predecessor, Dennis Muilenburg.
But Fitch estimates the company’s debt nearly doubled last year to around $ 27 billion. The company’s free cash flow collapsed as Boeing continued to manufacture planes even though it was prohibited from delivering them to customers. Free cash flow fell from $ 11.1 billion in the first nine months of 2018 to an outflow of $ 1.6 billion for the same period a year later. The company stopped production this month.
Wall Street banks step in
Boeing is working with its bankers to secure a new $ 10 billion loan that would help strengthen its balance sheet, according to several people briefed on the matter, and has received pledges from several major 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 safely certified, the loan has been structured to give Boeing great flexibility.
It is a two-year deferred drawing loan, which would allow Boeing to access the funds at a later date, according to one of the people briefed. The largest banks that have engaged in financing are expected to contribute around $ 1.5 billion to $ 1.6 billion each to fund the loan package.
Mr Fraser said the loan could be used to cover Boeing’s cash consumption in the first quarter, to pay off maturing debt of around $ 1 billion, or to refinance commercial paper debt that has become more expensive. as Boeing’s credit profile deteriorated.
Boeing also has an upcoming $ 4.2 billion cash payment for the acquisition of the commercial aircraft business of Brazilian aircraft maker Embraer – a deal it hoped to close by May – although regulators Europeans requested additional information last week, which will likely delay the closing date of the transaction.
The push to secure the new loan comes just months after Boeing increased its revolving credit facility with lenders to $ 9.6 billion. Bank of America, Boeing, Citi, JPMorgan, Wells Fargo and Morgan Stanley declined to comment.
Boeing maintains a good credit rating despite downgrades from Fitch and the two largest rating agencies S&P Global and Moody’s.
But S&P warned last week that a second downgrade could come and that it was revising the A-minus rating it gave Boeing last month. He could lower the rating if his analysts believed that “Max’s immobilization had weakened Boeing’s competitive position, for example by permanently damaging its reputation with customers and regulators,” he said.
The “Commercial Bank” is closed for the moment
Chief Financial Officer Greg Smith said last year that Boeing had “a lot of leverage” to pull to maintain financial flexibility.
This could include deferring capital spending, Fraser said, adding: “I feel there is a general level of belt tightening.”
Another possibility is that Boeing will bid less aggressively for defense work, said analyst Richard Aboulafia of the Teal Group. The strength of the company’s commercial aircraft business has historically enabled it to undercut its competitors and win contracts such as the US Air Force’s TX advanced trainer, the field support helicopter of MH-139 missiles and the US Navy’s MQ-25 aerial refueling drone. With Max’s crisis causing a large outlay of money, Boeing’s defense arm cannot rely on “the Bank of Commercial” to cover initial losses on large contracts, Aboulafia said.
Share buybacks are expected to remain on hold until 2020 and possibly 2021, Fraser said. Boeing repurchased $ 43 billion of its shares between 2013 and the first quarter of 2019, reducing the number of shares outstanding by 25%. Critics accused the company of being more interested in delivering returns to shareholders than investing profits in engineering.
Boeing will publish its quarterly results on Wednesday. Cowen analyst Cai von Rumohr wrote in a Jan. 22 note that the now extended timeline to put the Max back into service would hurt those revenues in two ways.
Boeing has already levied more than $ 5 billion in fees it owes airlines for the delayed delivery of the Max, and Cowen predicted that Boeing would increase customer compensation reserves by $ 6 billion. Meanwhile, the Max’s reported production costs are expected to increase by $ 4 billion.
Both of these estimates, von Rumohr wrote, now appear low.