On Wednesday, Moody’s downgraded Boeing’s (BA) debt rating. The ongoing troubles with the company’s best-selling 737 MAX aircraft got worse. Moody’s rating downgrade followed Boeing’s latest announcement about the 737 MAX’s future production plans. On Monday, the company announced that it would temporarily halt MAX production starting in January.
To learn more, read Boeing Considering Production Cut or Halt for 737 MAX.
MAX crisis could drive Boeing’s borrowing cost
Moody’s thinks that the MAX production halt would elevate Boeing’s financial and operational risks. The agency’s lead analyst, Jonathan Root, said, “The downgrades follow the extension of the grounding of the 737 MAX into 2020, the announced plan to shut down this important program for some interim period, and the uncertainty and elevated risk — both financial and operational — for Boeing and its broader supply chain over the ensuing period.”
Root said that the production suspension would increase the costs for Boeing’s 737 MAX program. Also, prolonged grounding would heighten compensation claims from MAX customers. Therefore, Moody’s lowered Boeing’s debt rating by a notch to “A3” from “A2.” Moody’s also warned that Boeing might face more credit rating cuts if the MAX grounding stretches into the second half of 2020.
Moody’s latest rating downgrade shows that the MAX crisis is driving up Boeing’s borrowing cost. Boeing ended the third quarter with a total outstanding debt of $24.7 billion—up from $19.2 billion at the end of fiscal 2018. The higher debt was mainly due to new debt issuance in connection with continued MAX production.
Following the worldwide flying ban, airlines haven’t taken deliveries of 737 MAX aircraft. Despite frozen shipments, Boeing continued to build 737 MAX planes at a monthly rate of 42 units. Therefore, the situation resulted in negative cash flows for Boeing in the last quarter.
During the third quarter, the company used $2.4 billion in cash for operating activities. The free cash flow in the quarter was -$2.9 billion. Moreover, in the first nine months, Boeing used $226 million in cash for operational activities. For the same period, the free cash flow was -$1.6 billion.
Moody’s raised Boeing’s short-term outlook
Despite lowering the debt rating, Moody’s raised its short-term outlook on Boeing to “stable” from “negative.” The agency cited Boeing’s strong financial position and strength in other businesses as the main reason behind its upbeat short-term outlook. Boeing ended the third quarter with cash and marketable securities of $10.9 billion—up from $9.6 billion in the second quarter.
In the release, Moody’s said, “The stable outlook reflects the company’s strong liquidity and financial flexibility which, together with stability in the defense business and ongoing growth in services, mitigates the impact while the MAX remains grounded.” The agency also said, “The stable outlook also reflects that Boeing’s historically aggressive financial policy will remain tempered, with no share repurchases until after a sustained recovery following the ungrounding of the MAX.”
Analysts lower the target price
Following Boeing’s announcement about halting MAX production, several analysts lowered their target price on the stock. They’re concerned about the company’s future cash flows. JPMorgan Chase analyst Seth Seifman and Baird analyst Peter Arment both cited similar reasons for their target price cuts.
Both of the analysts said that Boeing would continue to burn cash despite shutting down MAX production. According to Seifman’s analysis, the company would burn over $1 billion in cash every month. He also said that Boeing is burning nearly $2 billion of cash every month due to the MAX crisis.
To learn more, read Boeing Halts MAX Production, Analysts Cut Target Price.