Boeing's cash flow-woes hit company's bonds, raising fears of a debt downgrade

By Claudia Assis and Ciara Linnane

Boeing bondholders caught by surprise are flocking to new bonds with coupon step-ups

Boeing Co. on Thursday owned up to worse-than-feared cash flow for the year, upsetting equity and bond investors alike and stoking fears that its debt ratings could slide into junk-bond territory.

At an investor conference in New York, Chief Financial Officer Brian West warned investors that Boeing's second-quarter cash burn could match or be worse than the first quarter's $3.9 billion burn.

And what's more, Boeing is unlikely to see positive cash flow this year. Boeing has struggled with production issues and is seeking a new chief executive, but at the time of its first-quarter report said it expected to end the year cash-flow positive.

Boeing's shares (BA) dropped 7%, and the remarks also brewed discontent among bondholders, particularly those who went in on Boeing's $10 billion corporate-debt issuance in late April and gave the company a much-needed liquidity boost.

The jet maker saw robust demand for the deal, with order books peaking at $77 billion.

CreditSights analyst Matt Woodruff said he has fielded a few queries about the new cash-flow information from upset bondholders. The general feeling was one of frustration, Woodruff said.

When companies issue bonds, and particularly a bond deal of Boeing's size, bondholders assume that it's all there in the open, the analyst said.

"It's just bad form to come back three weeks later and say, by the way, this year is going to be worse than we thought," Woodruff said. "You have the bondholders wondering" why Boeing wasn't clearer sooner.

"Boeing has been a tough story going on for six years now, the analyst said. People are just saying, 'This is ridiculous. Why they didn't tell us before the bonds were issued?'"

Boeing's debt ratings are at the lowest rung of investment grade with a negative outlook for all three major bond ratings agencies, which took the actions in late April.

The ratings agencies are likely to give Boeing some time to get things in order and improve its operations, probably until the end of the year or early 2025, before making a decision on whether to push the ratings into high-yield territory, Woodruff said.

A slide would be a majorly negative credit event that would hamper Boeing's ability to borrow money and shut the bonds out from a much bigger pool of investors, including pension funds, that can only own investment-grade debt.

"By the end of this year, they really need to be showing some progress," Woodruff said. "They are not against a complete wall, but they need to show progress for sure."

By afternoon, however, a new trade had emerged with bondholders selling off longer-term debt and piling into the new 10-year bonds, which were issued with built-in coupon step features.

Those add 25 basis points in coupon for each notch of a potential downgrade. If Moody's and S&P Global Ratings downgrade the credit, holders of those bonds would get an extra 50 basis points of coupon.

However, the coupon step is capped at 1.00% per agency and 2.00% in total, as Bloomberg reported at the time.

The following chart from data solutions provider BondCliQ Media Services shows the buying of the new 10-year bonds, the 6.528% notes that mature in 2034.

Spreads on select Boeing bonds widened by five to 10 basis points initially, before settling back to five to seven points wider.

Yields on Boeing's bonds have climbed in the year-to-date and many are above 6%.

Boeing has more than $47 billion of outstanding bonds, with almost $8 billion due to mature in 2026.

-Claudia Assis -Ciara Linnane

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05-23-24 1405ET

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