Can Boeing preserve its credit rating?

As Boeing battles against production delays, worker strikes, and safety concerns, the company is seeking to avoid a downgrade by credit rating agencies that could exacerbate the financial pressures on the aircraft manufacturer. 

With $53 billion in bonds, Boeing’s financial situation is precarious. A successful recent equity raise provided Boeing with an influx of capital, buying time to resume production. However, ongoing issues continue to mount pressure. with the company’s substantial debt, standing at around $60 billion.

A downgrade would impact about $53 billion in Boeing’s bonds, representing a 7.15 percent increase in the S&P Global Ratings’ U.S. Speculative-Grade bond composite, currently valued at around $742 billion. For context, the largest single-day addition to this composite happened in 2005, when both Ford and GM were downgraded, increasing the speculative-grade market by 16 percent. As with the 2005 event, S&P expects the overall market impact to be manageable in the event of a downgrade, given the experience of larger events in the past, and the current backdrop for speculative-grade credit is largely favorable.

“On Friday, we extended Boeing’s negative credit watch,” Ben Tsocanos, A&D Analyst at S&P Global Ratings, explained, noting that the agency was “positively surprised” by Boeing’s equity raise that brought in US$24 billion in capital to repair the manufacturer’s balance sheet.

“The additional capital gives Boeing more time to restart production and work toward a positive cash flow. The trade-off, however, is a weaker outlook for next year.  In my view, despite the resolution of the strike, restarting production won’t be instantaneous—there will be a lag.

“In terms of market response, the stock price barely moved, despite the significant 20 percent dilution caused by the equity raise. From the debt perspective, bondholders received this positively.

“They’re generally pleased to see the extra capital. Some investors  have been frustrated by the lack of wider credit spreads, which would create a more attractive buying opportunity. But, if everyone is waiting for wider spreads, they may not materialize. That’s essentially how things look from my perspective.”

Boeing’s position

Boeing’s rating has been largely supported by the company’s market position, order backlog, and the aircraft manufacturer landscape.

One of Boeing’s core strengths lies not only in its balance sheet improvements, like the recent share sale, which helps offset ongoing losses, but also in its extensive order backlog. This substantial demand remains a major stabilising factor for Boeing’s operations.

Currently, there’s only one viable competitor on the scale of Boeing, Airbus, and, even if airlines wanted to switch to Airbus, there’s arguably little benefit, as airlines would still be waiting years for the aircraft to be delivered due to the Toulouse-based company’s own backlog.

“Boeing’s backlog represents potential revenue (around $500 billion), but it doesn’t directly translate to income or cash flow unless Boeing resolves its operational inefficiencies. If Boeing’s costs remain high, this revenue won’t be as beneficial. That said, our rating holds because we believe these issues are manageable and that Boeing can overcome them.

“It’s quite unusual to see an investment-grade rating for a company that has been losing money for such an extended period, making this a unique situation. For airlines, the repeated delays in plane deliveries can be frustrating; if deliveries are continually pushed back, it raises the question of whether Boeing can deliver on its promises,” Tsocanos outlined.

“That said, we’re still assuming that union workers will return, production will resume, and Boeing will be able to rebuild its delivery pipeline. There is a credible path forward, albeit a challenging one.”

How a downgrade could play out

In terms of the potential implications of a credit rating downgrade for Boeing, while it wouldn’t be insignificant, it would likely be minimally disruptive overall. However, financially, a downgrade would increase the interest on part of Boeing’s debt due to a step-up provision, adding around 25 basis points per downgrade notch, covering roughly half of its US$30 billion debt. While this increase isn’t negligible, it’s also not massive given the company’s scale.

“The less quantifiable impact could be on Boeing’s leverage in negotiations with customers, particularly regarding pre-delivery payments. A key component of their business model involves securing partial payments before delivery, which is a significant advantage,” Tsocanos laid out.

“However, international customers, who tend to be more sensitive to credit ratings, may be less inclined to pay upfront if Boeing’s rating declines, though any changes would likely depend on individual negotiations rather than fixed contractual triggers.”

Lengthy impact

The aviation industry’s cycles are incredibly long. Mistakes can have lasting consequences, and there’s real uncertainty about who will lead in the future. If Boeing can’t get its operations back on track for the next era of aircraft, it may not hold the same dominant position it has historically enjoyed.

“The reality is that the company wouldn’t be in this vulnerable position if it didn’t have significant quality issues dating back to the MAX crashes in 2018. There were signs they were beginning to address these issues, particularly after the January 5 event, and they had made some progress—MAX production was back to the high 20s before the strike,” Tsocanos added.

“However, while they’ve taken steps forward, there’s still a lot of work to be done, and these deep-seated problems won’t simply disappear when the strike ends. Effective alignment with the union will be essential to implementing necessary changes across their manufacturing processes.”