New York, January 30, 2020 -- Moody's Investors Service, Inc. ("Moody's") downgraded its senior unsecured debt ratings for The Boeing Company and of subsidiary, Boeing Capital Corporation, to Baa1 from A3. These ratings remain on review for downgrade. Moody's also affirmed the Prime-2 short-term rating, which is not on review.
"Boeing's Q4 earnings indicate significantly higher cash burn in 2020 than previously anticipated, increasing reliance on debt for funding the impact of a lower-for-longer recovery of the MAX program," said Moody's Senior Vice President and lead analyst, Jonathan Root. "We now anticipate that the road to restoring the MAX production system and Boeing's credit profile will run into 2023 and will be much costlier given significant negative free cash flow near $10 billion in 2020, even if the FAA ungrounds the aircraft by mid-spring," said Root.
The downgrade to Baa1 considers Moody's updated projections in which funded debt increases by upwards of $14 billion in 2020 because of negative free cash flow of about $10 billion, including about $4.6 billion for annual dividends. Moody's assumes Boeing will also complete the $4+ billion investment in Embraer's commercial aircraft business in 2020. Moody's previously expected about $3 billion of positive free cash flow in 2020, prior to the company's earnings release. It now anticipates that free cash flow will inflect positively in 2021, to about $4 billion, all of which will be used to reduce debt. The downgrade also reflects what Moody's views as an aggressive financial policy, evidenced by the board's decision to hold the dividend in lieu of organically preserving liquidity and an otherwise stronger balance sheet. Based on Moody's projections, about $12 billion, or almost half of the roughly $27 billion increase in debt Moody's projects between the end of 2018 and the end of 2020, will have funded returns to shareholders.
The review for downgrade mainly reflects the ongoing uncertainty of when the US Federal Aviation Administration ("FAA") will unground the MAX and the potential financial impact of various associated risks, including MAX delivery and production rates, supply chain health, integrity of the order book, customer compensation and financial policy.
RATINGS RATIONALE
The Baa1 senior unsecured rating balances the pressures on the company's financial profile with its position as one of two manufacturers of large commercial airplanes and a prime US defense contractor, and the implicit support of that enviable position which had previously underpinned prior ratings. The diversification of the defense and services businesses helps mitigate some of the near-term risk within the company's commercial aircraft operations even after the MAX' return to service. The Baa1 rating also considers the potential for the FAA to unground the MAX in April or May of this year, and the liquidity benefits of the $12 billion term loan the company intends to execute in February. The company's corporate governance practices, including the effectiveness of the Board's Aerospace Safety Committee and the new Product and Services Safety organization and other programs to restore its reputation and strengthen performance across its operations and related social considerations that could have a more lasting impact on the company's future will also remain rating considerations.
Evidence of even higher financial costs associated with a grounding that runs into the second half of 2020 could lead to a rating downgrade to Baa2, as could unforeseen circumstances that cause Boeing to issue more debt beyond a full draw of the new term loan. Moody's notes that the rating outlook for Boeing would likely be negative for some time to reflect lingering and potentially substantial operational and financial risk that will accompany the restoration of the narrow-body operations. The restoration of the MAX' cash flows and production system that restores annual free cash flow to above $5 billion and leads to debt repayment and improved key credit metrics, such as debt-to-EBITDA of below 2.5x and retained cash flow to net debt of more than 25% could lead to a ratings upgrade.
The principal methodology used in these ratings was Aerospace and Defense Industry published in March 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The following rating actions were taken:
Downgrades:
..Issuer: Boeing Capital Corporation
....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3; Remains Under Review for further Downgrade
..Issuer: Boeing Company (The)
....Senior Unsecured Shelf, Downgraded to (P)Baa1 from (P)A3; Remains Under Review for further Downgrade
....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa1 from A3; Remains Under Review for further Downgrade
..Issuer: Miami-Dade County Industrial Development Authority, FL
....Industrial Revenue Bonds, Series 1999A LT Rating, Downgraded to Baa1 from A3; Remains Under Review for further Downgrade
Affirmations:
..Issuer: Boeing Company (The)
....Senior Unsecured Commercial Paper, Affirmed P-2
Confirmations:
..Issuer: Miami-Dade County Industrial Development Authority, FL
....Industrial Revenue Bonds, Series 1999A ST Rating, Confirmed at VMIG 2
The Boeing Company, headquartered in Chicago, Illinois, 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. Boeing reported $76 billion of revenue for 2019, including a reduction of about $8.6 billion for the customer compensation charges it booked in the year, down from $100.8 billion in 2018.