NEWS ANALYSIS: How Boeing went from cap in hand to cash in hand in just six weeks
Upsized deal and support from US Fed made all the difference for plane maker
New York/Washington — In just six weeks, Boeing Co went from seeking government aid to announcing it no longer needed it.
The company's $25bn bond issue this week, this year's largest investment-grade bond issue and the sixth-largest on record, made all the difference.
The upsized deal surpassed Boeing's expectations, with the Chicago-based company managing to capitalise on US government support, even without having to accept taxpayer money as aid.
On March 24, the company’s CFO Greg Smith told Reuters in an interview that the credit markets were “essentially closed” to the largest US plane maker, and that the entire US aerospace industry urgently needed capital to cope with the fallout from the coronavirus outbreak.
A $2.3-trillion US stimulus package, enacted into law at the end of March to provide relief to the US economy which was hit hard by the pandemic, subsequently carved out $17bn in aid for Boeing and other companies critical to national security.
Boeing itself had lobbied extensively for aid and had called for at least $60bn government loans for the entire aerospace manufacturing sector. “We can’t let anything happen to Boeing,” US president Donald Trump said last month, in one of the many instances he expressed support for the company.
Fed support ... has been the primary driver of what is allowing risk assets to boom.Mark Heppenstall, Penn Mutual Asset Management
Several bond investors in interviews with Reuters cited the US government’s backstopping of Boeing, as well as the Federal Reserve’s support of the credit markets in the aftermath of the pandemic, as reasons for the success of the capital raise.
“Boeing is pretty vital to, not just the US economy, but to national security interests. Also, you can't argue (with the fact that) the Fed support is what has been the primary driver of what is allowing risk assets to boom,” said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management.
Already saddled with $39bn debt as of the end of March, Boeing started the week searching for cash, to cope not just with affect of the coronavirus outbreak on air travel, but with the long grounding of its flagship 737 Max aircraft as well, after a string of accidents.
Smith and Boeing CEO David Calhoun had taken what they called a “balanced” approach, reiterating on Wednesday that they were exploring a mix of government aid and commercial funding.
One potential source of government aid, the $17bn national security-related fund administered by the US treasury department, came with significant strings, including the possibility of the US government getting a stake in Boeing. That could have led to Boeing's shareholders getting diluted.
Then Boeing had a breakthrough. Its plan was to gauge investor interest for a bond issue of between $10bn and $15bn, according to people familiar with the deliberations. Yet demand for the bonds on Thursday peaked at more than $70b from over 600 investor accounts, according to the sources.
Credit ratings agencies told Boeing it could borrow as much as $25bn through a bond issue and just about retain its investment-grade rating, according to the sources.
This was important for Boeing, to reign in its borrowing costs and attract more investors to the bond offering, the sources said. Investors that traditionally invest in junk-rated debt, such as hedge funds, also flocked to Boeing’s bond issue, because it was priced at premium to investment-grade deals, according to the sources.
Boeing priced different bond tranches spanning several maturities at between 450 basis points and 593 basis points, whereas the average spread for bonds of Boeing’s credit rating is 306 basis points, according to ICE BofA Data.
“Let’s face it, Boeing is not an investment-grade company by any stretch of the imagination,” said Nick Maroutsos, co-head of global bonds at Janus Henderson Investors.
Boeing declined to say on its internal planning for the capital raise.
But Boeing announced on Thursday that as a result of the strong response to its bond offering, it did “not plan to seek additional funding through the capital markets or the US government options at this time.”
Boeing had to make concessions to cajole the credit ratings agencies and bond investors. It agreed to increase interest payments by 25 basis points each time the two biggest credit ratings agencies lowered its rating by one level into junk, according to the bond issue's prospectus. It capped these concessions at 100 basis points per credit-rating agency and 200 basis points in total.
Boeing expects the money from the bond issue to cover its funding needs for the year, barring any unexpected event. Before announcing it would no longer seek government aid, it stress-tested its financial assumptions and considered numerous scenarios to ensure it has liquidity for the remainder of the year, according to the sources.
Boeing has also had to take several cost-cutting measures, including announcing plans to shed about 16,000 jobs this year, about 10% of its workforce, through early retirements and likely layoffs.
On Friday, Smith told Boeing employees in a message he wanted “to thank the administration for the actions they have taken to support our economy and the credit markets.”