WASHINGTON D.C. (S&P Global Ratings) July 29, 2019--S&P Global Ratings today assigned its 'A' issue-level rating to Chicago-based aircraft manufacturer and defense contractor Boeing Co.'s proposed senior unsecured notes. The company plans to issue the notes in six tranches due 2021, 2027, 2030, 2035, 2050, and 2059. Boeing plans to issue up to $5.5 billion in notes.
We expect that the company will use the proceeds from the proposed notes for the approximate $4 billion investment in the previously announced joint venture to operate Embraer S.A.'s commercial aircraft and services businesses, and for general corporate purposes. Any remaining funds would bolster cash reserves as the company continues to deal with the 737 MAX grounding. We do not believe the transaction will significantly alter Boeing's credit metrics; therefore, all of our other ratings on the company are unchanged.
Boeing took a $5.6 billion pre-tax charge in its second quarter 2019 results to compensate airlines for the grounding of its 737 MAX aircraft and the suspension of deliveries. We expect that only a small portion of that amount will be cash compensation, which the company will likely pay out in the next six to nine months. The remainder will likely be in the form of discounts on future orders, free upgrades or services, or the rescheduling of deliveries that will occur over the next few years.
Boeing also added $1.7 billion to the total 737 program's cost due to the higher costs related to the longer-than-expected period of reduced production. This brings the total additional production costs to $2.7 billion, which will modestly reduce the company's margins on the aircraft (though they will likely remain the highest among any of Boeing's commercial aircraft programs). The company anticipates that the MAX could return to service, at least in the U.S., in the fourth quarter of this year and expects to increase production to 57 aircraft a month from 42 by the end of 2020, which is similar to our expectations. However, further delays in the certification process for the MAX's updated software could prolong the grounding. In addition, each country may choose to recertify the aircraft at different times. In its second quarter earnings call, the company for the first time mentioned the possibility of halting MAX production temporarily, though implied that this was not likely.
Boeing's credit metrics will very likely deteriorate over the next few quarters, and could temporarily fall below our downgrade trigger of funds from operations (FFO) to debt of less than 40%, but we still believe its ratios will likely improve to levels appropriate for the current rating by the end of 2020. However, we could lower our rating on the company if we believe the damage to its financials is more lasting than we expect or that the MAX will suffer a substantial loss in market share. And, we could revise our outlook on the rating if the risk of those outcomes increases. We will also consider the risks and potential implications of halting deliveries or more of substantial delays in a return to service. We believe Boeing has sufficient liquidity to fund the inventory build, compensate the airlines, pay the direct costs to fix and return the fleet to service, and cover any assistance it may be providing to its suppliers. We also do not expect the company to resume its share repurchases until MAX production is back on track and it has restored its balance sheet to its previous strength and have factored that into our rating and outlook.
Our ratings on Boeing reflect its position as one of the two global producers of large commercial jetliners and as one of the largest U.S. defense contractors. They also reflect the cyclical and competitive nature of the commercial aviation market, the possible budget pressures affecting U.S. defense spending, and the significant investments required to develop new aircraft.
ISSUER RATINGS—SUBORDINATION RISK ANALYSIS
Pro forma for the proposed debt, the company's capital structure will comprise approximately $20.3 billion of unsecured debt issue by Boeing Co. and $2.5 billion of debt issued by its subsidiary Boeing Capital Corp. We consider Boeing Capital to be a captive finance company so its debt is not included in our subordination analysis.
We rate the company's unsecured debt 'A', the same level as our issuer credit rating, because there is no evidence of significant subordination risk in its capital structure.