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Moody's Threatens Boeing With Junk Downgrade As Strike Halts 737 Production

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by Tyler Durden
Friday, Sep 13, 2024 - 05:10 PM

Update (1310ET):

Moody's warned that Boeing is at risk of losing its investment-grade credit rating following the massive labor action that began in the early morning hours when 33,000 of its unionized workers stepped off the production line and into the picket line. The struggling planemaker faces the prospect of a lengthy strike that would crimp production and dwindle cash reserves. 

The credit ratings agency placed all of Boeing's ratings, including its Baa3 senior unsecured and P-3 commercial paper ratings, under review for downgrade hours after the strike was announced by the International Association of Machinists And Aerospace Workers. The strike, triggered by the rejection of a tentative agreement, has halted production at Boeing's Seattle factories. The review will evaluate the strike's impact on cash flow, Boeing's equity capital plans, and production challenges with the 737 and 787 models. 

Moody's noted that prolonged labor disruptions could undermine Boeing's commercial airplanes recovery, complicating liquidity as $12 billion in debt matures through 2026. The strike may lead to a downgrade if Boeing's liquidity deteriorates significantly or if it fails to generate sufficient free cash flow, which remains constrained through 2025 due to production challenges and cost pressures.

Boeing's rating is one step above the speculative grade, which is also known as "junk." The company has emphasized the importance of maintaining its investment-grade rating, showcasing in every quarterly earnings presentations, such as the latest one... 

Hmm.

Boeing shares are down 4% on the session. 

Great job, Boeing. 

Here's the full report from Moody's:

Moody's Ratings places Boeing's ratings on review for downgrade

Moodyʼs Ratings (Moodyʼs) has placed all of The Boeing Companyʼs (Boeing) ratings on review for downgrade, including the Baa3 senior unsecured rating and P-3 commercial paper rating. This follows this morningʼs strike by the companyʼs aircraft mechanics and assemblers represented by The International Association of Machinists District 751 (IAM). About 95% of the union membership voted to reject the tentative agreement and to strike. Aircraft production across the companyʼs Seattle, Washington area factories will cease until the parties agree to contract terms that the membership will ratify. We also placed the Baa3 long-term and VMIG-3 short-term ratings assigned to the revenue bond issued by Miami-Dade County Industrial Development Authority, FL, on review for downgrade. The rating outlook, now under review, was previously negative.

In our review, we will assess the strikeʼs duration and impact on cash flow and the potential equity capital raising Boeing may undertake to bolster its liquidity. We will also assess the extent to which the strike and ongoing challenges in increasing production of the 737 and 787 aircraft models affect the timing of growth in production rates and the pace and scale of improvements in Boeingʼs operating cash flow. Additionally, we will consider the costs for Boeing to complete the fixed price contracts in the defense business, which will continue to be a drain on earnings and operating cash flow.

A prolonged strike would fracture the recovery of the Commercial Airplanes business, which remains in its early stages. We believe production of the 737 MAX narrowbody increased to near 30 per month for July and August. This compares to the US Federal Aviation Administrationʼs (FAA) 737 production cap of 38 per month (Cap). Accurately estimating the daily cost of the strike to Boeing is challenging. The IAM membersʼ 57-day strike in 2008 cost Boeing around $1.5 billion per month or $50 million per day at a time when 737 production was at its then normal production rate of about 34 per month. Additionally, the cost base of the Commercial Airplanes segment was lower compared to todayʼs cost base.

RATINGS RATIONALE/FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The Baa3 rating reflects Boeingʼs still strong business profile, which continues to mitigate the ongoing weak performance in Commercial Airplanes that we expect will constrain free cash flow through 2025. Backlog was $516 billion on June 30, 2024, slightly below the $520 billion coming into 2024. The Baa3 rating incorporates our view that credit metrics will remain weak for an investment grade rating through 2026. Current 737 monthly production trails the current FAA Cap as Boeing takes actions to improve the quality of its 737 assembly operations. Internal investments in training, digitization of assembly procedures and increased inspections among other actions slow the 737 lineʼs flow and productivity. No longer allowing Spirit to ship 737 fuselages with defects as of March 1, 2024 contributes to the slowdown in production. Fully remediating its aircraft assembly operations will proceed at a slower pace than needed to currently produce positive, and then growing, free cash flow. Approval by the FAA of updated assembly documentation procedures and compliance therewith will be the key gating item for expanding production above the Cap.

The path to restoring compliance, higher quality and strong cash flow in its commercial aircraft assembly operations remains fraught with execution risk. Annual free cash flow will fall short of the $4.0 billion of debt coming due in 2025 and also the $8.0 billion coming due in 2026. This month, Boeing revised the supplier master schedule for the 737, which now contemplates a rate of 42 per month in March 2025, a six-month delay compared to the just prior master schedule. Any increase in monthly production rate will require approval from the FAA, which will also be predicated on the health of key supplier Spirit AeroSystems, Inc. and the supply chain.

The ratings could be downgraded if the IAM strike is prolonged, leading to material reduction in Boeingʼs liquidity after considering proceeds from any capital raising the company may undertake. The ratings could also be downgraded if Boeing needs to issue debt alongside any equity raised to meet its liquidity requirements including the retirement of the approximately $12 billion of debt maturities between now and the end of 2026. Insufficient growth of annual deliveries of commercial aircraft or recurring material charges and cash costs for contracts in the defense segment would be the likely impediments to generating sufficient free cash flow. There will be little upward ratings pressure before adjusted debt nears $30 billion and annual free cash flow has been sustained above $8 billion. These levels remain years away. An upgrade would also depend on Boeing improving execution across its programs and maintaining strong corporate governance practices and conservative financial policies.

The Boeing Company, headquartered in Arlington, Virginia, is a leading large commercial airplane manufacturer and one of the largest prime contractors for aircraft and related systems to the US Department of Defense. The company operates in three principal business segments: Commercial Airplanes; Defense, Space & Security; and Global Services. Revenue was $77.8 billion in 2023.

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Members of the International Association of Machinists And Aerospace Workers, which represents 33,000 Boeing employees at factories near Seattle and elsewhere, overwhelmingly rejected a 'historic contract offer' with the troubled planemaker and voted to go on strike. 

IAM said 94.6% of union members rejected the contract offer from Boeing, which called the offer "historic" and highlighted the 25% wage increase over four years as "the largest-ever general wage increase." About 96% of union members approved the strike, now unfolding at the planemaker's Seattle factories that make the 737 Max. 

The union released this statement:

"We are incredibly proud of the hard work and dedication shown by the negotiating teams from District 751 and W24 and the unwavering solidarity of our membership. Their tireless efforts have been on display throughout this entire process. Now, they will regroup and begin planning the next steps on securing an agreement that our membership can approve.

"We will make every resource available for our District 751 and W24 members during this challenging time. IAM members from across North America stand in solidarity with our members in the Pacific Northwest and California. Our goal is to get a strong contract that meets the needs of our members."

Jon Holden, president of IAM District 751, said this labor action "has been a long time coming, our members spoke loud and clear tonight," adding, "Clearly there were aspects of this agreement that weren't good enough." 

The last time Boeing machinists went on strike was September 7, 2008. At the time, the strike was over job security, outsourcing, pay, and benefits.

Now, as explained by Holden, union workers at Boeing have been plagued with 16 years of stagnated wages. This comes as Bidenomics backfires on the economy, with elevated inflation and high interest rates financially crushing the working poor.

He said, "There's a lot at stake here for our members, so I am proud of them. And we're going to get back to the table as quickly as we can." 

Boeing told Bloomberg it remains "committed to resetting our relationship with our employees and the union, and we are ready to get back to the table to reach a new agreement."

In premarket trading in New York, Boeing shares are down around 4%. As of Thursday's close, shares were down nearly 38% on the year. 

"Boeing has been in a financially difficult situation since the January 5 accident exposed deficiencies at its factories and forced the planemaker to reduce production. The company has been bleeding cash as a result, and its credit rating is hovering one step above speculative grade as it contends with a heavy debt load of $45 billion," Bloomberg noted. 

Here's what Wall Street analysts are saying about the labor action:

Jefferies analyst Sheila Kahyaoglu (buy, PT $270)

  • “The magnitude of the strike’s impact will be dependent on its duration”
  • The company was hit by a 58-day strike in 2008 — delaying >100 aircraft deliveries
  • “Boeing stated that it was ready to get back to the table and reach a new agreement,” Kahyaoglu writes

Bloomberg Intelligence analyst Tim Bacchus

  • Boeing’s latest strike, even an extended one, “might have relatively little impact on Asian and Mideast airlines”
  • “In Europe, Ryanair is most exposed as it expects eleven 737 MAX 8 deliveries, nine which are unfinished”

Since Boeing is the single largest US exporter, an extended work stoppage at commercial jet factories would result in fewer exports, contributing to lower GDP growth. 

Furthermore, depending on the length of the labor action, it could spark serious issues for nearly 10,000 Boeing suppliers that can be found across the US. 

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