Boeing (BA) is considering raising its debt as the grounding of its 737 MAX has stretched into 2020, reported The Wall Street Journal this morning. According to The Wall Street Journal, Boeing could raise $5 billion in debt to cover its rising expenditure. The report stated that the aircraft manufacturer’s expenses could be more than $15 billion in the first half of 2020.
Additionally, the company plans “deferring some capital expenditures, freezing acquisitions and cutting spending on research and development to preserve cash,” reported The Wall Street Journal.
This instance would be the third time Boeing has raised its debt since the worldwide grounding of its MAX aircraft in mid-March. The company raised $5.5 billion in debt in July 2019, and $3.5 billion through issuing senior unsecured bonds in April. In the same month, Boeing also took out a $1.5 billion term loan.
Is Boeing running out of cash?
According to The Wall Street Journal, the company isn’t running out of cash. However, its finances have been strained following the grounding of its MAX jet after two deadly accidents within five months.
The MAX accounted for around 70% of Boeing’s overall commercial deliveries. Following the grounding, airlines stopped taking deliveries of the said model, but the company continued MAX production. As a result, Boeing was burning cash to bear fixed expenses and labor charges.
Therefore, Boeing recorded a negative cash flow of $2.9 billion in the third quarter of 2019 and used $2.4 billion in cash for operating activities. At the end of the quarter, Boeing’s total debt outstanding was $24.7 billion, $5.5 billion higher than in fiscal 2018. The higher debt reflects new issuances to support MAX production during the grounding.
Boeing’s MAX crisis costs rising
Southwest Airlines (LUV) and American Airlines (AAL) expect the MAX grounding to reduce their 2019 revenue by approximately $1 billion in total. Together, the two companies own 58 Boeing 737 MAXs. Before the flying ban in mid-March, there were about 380 MAX planes in operation.
In its third-quarter earnings release, Boeing revealed that its overall costs related to the MAX grounding had reached $9.2 billion. Of that total, $5.6 billion was an estimated compensation provision for MAX customers’ losses. The remaining $3.6 billion was incremental production costs due to the reduced MAX output. Although Boeing didn’t halt MAX output until December, it reduced the monthly output by 19% to 42 units in April.
Boeing halts MAX output to save cash
On January 1, the aircraft manufacturer stopped MAX production to save money. However, industry experts believe the production suspension won’t save Boeing much cash.
Last month, JPMorgan Chase analyst Seth Seifman said Boeing would still burn cash despite halting MAX production. Seifman estimates the aircraft manufacturer could continue burning over $1 billion every month after the production shutdown. According to his estimates, the company was burning approximately $2 billion every month until December 2019.
Peter Arment of Robert W. Baird has also cautioned that Wall Street’s free cash flow estimates are too high. To learn more, read Boeing Halts MAX Production, Analysts Cut Target Price.
Credit rating agencies downgraded Boeing
Boeing’s borrowing news has come weeks after two agencies downgraded its debt rating. Moody’s downgraded Boeing’s credit rating on December 18 to “A3” from “A2.” The agency’s lead analyst, Jonathan Root, believes the production halt will elevate Boeing’s operational and financial risks.
S&P Global Ratings followed in Moody’s footsteps and lowered its short-term rating to “A2” from “A1,” according to TheStreet. The agency also reduced its long-term rating on the aircraft manufacturer stock to “A-” from “A.” S&P thinks the production halt could disrupt Boeing’s supply chain in the long run and impact its competitiveness.
Wall Street analysts have changed their stance on Boeing stock due to the MAX crisis. Before the MAX grounding on March 13, around 79% of the 24 analysts covering BA had a “buy” equivalent rating. However, that proportion has reduced to 43%. Moreover, none of the analysts were bearish before the mishap. Now, two of the analysts (about 9%) have a “strong sell” recommendation.
Analysts’ average target price for Boeing stock has fallen 17% to $366.40 from $440 on March 13. Their average target price implies an 11.5% return from BA’s closing price of $332.76 on January 3.