Boeing ranks fifth on the list of the largest cumulative stock market compounders in U.S. history. But these days, it’s one of the most prolific corporate dumpster fires in the United States and could become the biggest “fallen angel” in history.
A quick scan of recent headlines on MainFT reveals the following: Karma is coming to Boeing shareholders. Could things get any worse for Boeing?Boeing factory workers reject latest contract offerBoeing reports $6 billion in losses due to ‘significant performance degradation’ due to major defects. Boeing plans to cut 17,000 jobs and delay its 777X jets because of a lack of revenue. Boeing is seeking up to $35 billion to shore up its balance sheet. Is there anyone who can fix a Boeing?
And that’s been since October.
But at least the company achieved an absolutely massive raise. From MainFT yesterday evening:
Boeing has raised $21.1 billion in the largest stock sale in its history as new management rushes to shore up its balance sheet and avoid a downgrade to junk rating.
The troubled aircraft maker raised $16.1 billion in capital by selling 112.5 million shares of its common stock at $143 per share, but the company lost money and several businesses closed due to the strike. Sometimes it stopped. An additional $5 billion was raised through the sale of securities holding convertible preferred stock interests.
The deal is the largest equity financing ever by a U.S. company and the fourth-largest in the world, excluding deals that did not involve issuing new shares, according to Bloomberg data. The financing, which closed late Monday, could grow by an additional $3.2 billion if the Goldman Sachs-led banks exercise certain options related to the offering, which is expected to occur within days. There is.
This comes after agreeing to a $10 billion loan facility and helps avoid concerns about a financial disaster for at least the next year or two. Shareholders welcomed the move, despite significant dilution. Boeing stock rose 13% this week, pushing its market cap to more than $100 billion.
However, the investment-grade credit rating it hopes to secure through its recapitalization remains unstable.
S&P, Fitch and Moody’s all rate Boeing at BBB, the lowest investment grade rating, with negative outlooks. Even as details of the capital raise make headlines, JPMorgan analysts said they still think Boeing could still fall into junk territory.
Certainly investors still seem to think it’s possible. This is a graph showing that the yield on Boeing’s February 2030 bond (the closest maturities to the broad high-yield market) has exceeded the March BBB average yield and is now trading near the Junk BB average. .
In fact, Boeing’s March 2025 bonds are still trading at a yield of 5.94% even after repairing its balance sheet. Yields on bonds maturing in less than six months are higher than those on intermediate-term bonds, a clear sign that many investors remain concerned about the near-term rating outlook.
After all, the company is still in trouble, with only two of the three credit rating agencies downgrading Boeing, which removed the company from all major investment-grade corporate bond indexes and replaced it with more junk bonds. You can participate in the index.
This is important because Boeing has issued bonds with a face value of $53 billion (total debt is about $58 billion). If the company were to be demoted from investment-grade territory, it would be the largest “fallen angel” in history, surpassing Ford’s $52 billion debt downgrade in March 2020.
That would instantly make it the single largest issuer of high-yield bonds. Furthermore, given the limited concentration of some investors, Boeing may have a large weight (3.6% in the JPMorgan index, about 4% in the iBoxx index, and 7% in the S&P index). It can be difficult to own because of its high price.
This kind of splash is likely to result in a splash of this kind as rating-constrained investors are forced to exit Boeing or other investors chip away at their existing holdings to make way for the Boeing paper. This could cause ripples in the corporate bond market.
But, much to the chagrin of financial news editors who love headline drama about “fallen angels,” this is unlikely to have much of an impact on the broader market. Or perhaps even something minor.
First, while large in isolation, Boeing’s downgrade will not come at a time of broader turmoil, as was the case with the Ford downgrade in 2020. This is a slow-moving train wreck, and the credit markets are currently blazing hot. That moment. Many junk bond funds will likely appreciate the additional supply.
And it won’t be the biggest correction for the junk bond market either. On May 5, 2005, both General Motors and Ford were downgraded to junk status with combined debts of $87 billion. At the time, the high-yield bond market was much smaller.
The market is much larger these days, and despite long-standing concerns over liquidity, trading conditions are fairly healthy, JPMorgan credit analysts say.
Liquidity in the high yield market can fluctuate depending on market conditions, but it has increased significantly over the years. So far in 2024, daily trading volume in high-yield bonds has averaged about $15 billion. The new issuance market is also large, with approximately $246 billion in high-yield bonds issued in the loan market (78% refinancing, 22% new funding) and $923 billion in the loan market (87% refinancing/repricing, new funds (13%). In 2023, $176 billion of bonds (66% refinanced and 34% new financing) and $370 billion of loans (78% refinanced/repriced and 22% new financing) will be priced in the sub-investment grade market. It is set. In our view, while there may be some volatility, Boeing bonds (existing and new issues) can absorb market disruption with limited market disruption at high yields.
Ford, Kraft Heinz and Occidental Petroleum were the most high-yielding downgrades in a decade. In the event of a downgrade, the transition to higher yields was largely orderly. Although these three companies had large amounts of debt, they were relatively small compared to the overall high yield market. Boeing’s debt, at about $58 billion, is greater than that of Ford, Kraft Heinz, and Occidental Petroleum ($52 billion, $23 billion, and $32 billion, respectively). At approximately 3.5% of the high yield market, we believe the combined market size and daily liquidity is sufficient to orderly transition Boeing’s bonds from investment grade to high yield.
Finally, does it actually matter to Boeing itself? The company’s management has certainly made it clear that maintaining its investment grade rating is a priority.
After all, some bonds come with clauses that allow interest rates to rise if they are downgraded to junk status. This will immediately increase Boeing’s annual interest costs by about $200 million to $2.9 billion, according to JPMorgan. Future refinances, which will inevitably involve large refinances, will also be more expensive.
But Boeing doesn’t have to be investment grade. Many companies live permanently and perfectly happily in the world of junk bonds. Even before the balance sheet repair, JPMorgan concluded in a report that:
The high yield market is a large and mature asset class with many high quality issuers. We are the only aircraft carrier builder and one of two U.S. nuclear submarine builders, Huntington Ingalls, which was a high-yielding company when it was spun off from Northrop Grumman in 2011. I remember that.
What we are saying here is that to ensure that Boeing is well-positioned for long-term growth, it is important to increase capital/capitalization and reduce balance sheet risk. That means there is. Perhaps the fight to remain investment grade shouldn’t be the main objective, but rather ensuring sufficient liquidity and pushing maturities, even if it means raising money in the high yield market. You should position your company for long-term success.
We maintain our view that if Boeing is downgraded to high yield, it will likely return to investment grade within three years. Rolls-Royce had maintained a high yield for about four years after being downgraded due to the coronavirus pandemic. We believe Boeing is likely to improve its metrics to investment grade faster than Rolls-Royce.
