Moody’s looks at downgrading Boeing debt.

January 14, 2020
Boeing MAX
A parked MAX. Photo: Woody's Aeroimages/Twitter

Credit rating agency Moody’s Investors Services has placed Boeing’s debt ratings, including its A3 senior unsecured ratings, under review for a downgrade as the Boeing 737 MAX crisis stretches on into 2020.

The rating agency cited the announcement of significant layoffs at major supplier Spirit AeroSystems and recent news about Boeing employee emails revealing attempts to avoid MAX simulator training and minimize differences with the 737NG as among the reasons for the review.

Spirit makes fuselages and other major components for the 737 MAX and last week announced it would lay off about 2800 staff after due to Boeing decision to suspend production due to uncertainty about the return to service of the troubled aircraft.

READ: New Boeing CEO takes reins amid renewed public firestorm.

Recent estimates put the cost of MAX groundings at up to $US8 billion.

“Recent developments suggest a more costly and protracted recovery for Boeing to restore confidence with its various market constituents, and an ensuing period of heightened operational and financial risk, even if certification of the MAX comes relatively near-term, as expected,” said Jonathan Root, Moody’s senior vice president and lead analyst for the company.

Moody’s said emails released last week brought to the forefront the judicial, legislative and regulatory risk that had existed since the grounding of the MAX last March after two fatal accidents.

It noted these risks had mostly been in the background while the focus had mostly been upon returning the MAX to service.

“Moody’s considers that the longer the grounding runs, the greater the risk to Boeing’s already blemished reputation with broadening governance and social considerations related thereto, which could have a more lasting impact on the company’s future business,’’ it said.

Considerations in the review would include timing of regulatory approvals for a MAX return to service and how a requirement for pilot simulator training would affect the return to service of the 387 grounded aircraft.

It would also look at how soon Boeing could start delivering about 400 aircraft built since the grounding, the company’s projected monthly production rates once deliveries restarted, the impact of the decision to suspend production on the supply chain and additional separate charges for compensation to customers.

Moody’s had earlier warned that Boeing’s decision to suspend MAX production this month was expected to result in substantial operational disruption and significant financial pressure on Spirit and the broader MAX supply chain.

It downgraded Spirit from Ba2 to Ba3, taking it into junk territory and noting that Spirit’s liquidity profile “will quickly and materially erode in the absence of mitigating developments that remain largely out of the company’s control”.

The agency said recent events had led it to assert that Spirit’s earnings and cash-generating capability have weakened meaningfully “relative to historical trends and prior expectations and will likely remain as such for at least the next two years”.

“Pending layoffs of size suggest ongoing event risk and operational disruption related to now much slower anticipated resumption of production on the MAX program, upon which Spirit is heavily dependent for about half of its revenue and the majority of its earnings and cash
flow,” said Moody’s lead analyst for Spirit, Eoin Roche.

“The combination of Spirit’s heavy concentration on the MAX program and meaningfully lower anticipated build rates will result in a significant disconnect between revised sales as forecast and a cost base established for what was supposed to have been a multiple of the now likely materially revised plan for volume throughput.”

The rating agency said it expected some sort of significant negotiated agreement between Boeing and Spirit in the “relatively near term”.