In response to strikes and business difficulties, Boeing (BA.US) plans to raise up to $25 billion to improve liquidity

The Zhitong Finance App learned that Boeing (BA.US) is preparing to raise up to 25 billion US dollars through debt issuance and equity financing to provide the troubled aircraft manufacturer with financial resources to withstand a paralytic strike and work to overcome a series of operational setbacks.

According to a Tuesday filing, the company submitted a so-called “reserve” application as a precursor to a possible increase in equity. Funding can be made up of debt or equity, and take many forms.

“This universal shelf registration provides the company with the flexibility to seek various capital options as needed to support the company's balance sheet over a three-year period,” Boeing said.

The increased funding will help Boeing improve its bargaining position with the workers on strike, who have shut down production at key plants in the Seattle area for a month. The union is seeking to raise wages and restore pensions, and negotiations broke down again last week as both sides insisted on their demands.

The company is also addressing quality issues with its best-selling 737 Max jet under the supervision of regulators that restrict production. The long-overdue 777X project was further delayed until 2026 last week.

People familiar with the matter said that Boeing is considering a capital increase of at least $10 billion. If the company continues to advance, a deal of this scale will be the largest listed company since Saudi Arabian Oil Co. (Saudi Arabian Oil Co.) sold shares for $12.3 billion in June this year.

Before the US stock market on Tuesday, Boeing's stock price fluctuated sharply as investors weighed the impact of potential stock dilution and a stronger balance sheet.

The aircraft manufacturer also said it has reached a new $10 billion credit agreement that will give it “additional short-term liquidity while dealing with a challenging environment.”

Credit Arrangements

The company said it has not used this loan or its existing credit cycle, adding that the new line of credit has an immediate repayment clause to prevent it from using loans and raising public capital.

Boeing is working to avoid a potential downgrade of the company from Moody's Ratings and S&P Global Ratings. Both rating agencies have said in the past five weeks that they may downgrade Boeing's credit rating to junk. These measures will raise the company's interest costs and reduce Boeing's investment appeal to some funds.

Boeing revealed late last week that apart from $10 billion in cash and short-term securities, it only buffered a small portion of the funds to avoid falling to the junk level. According to S&P estimates last week, a strike by members of a mechanic's union in the Pacific Northwest cost the company more than $1 billion a month, even after implementing cost-saving measures. The Pacific Northwest is an important hub for Boeing aircraft production.

For a company that has been suffering all year long, the strike is just one in a series of unfortunate events. In January of this year, a strange accident blew up a gate-sized hole in the fuselage of an aerial 737 Max, forcing the company to slow down production to solve problems in the manufacturing process. The stock is heading for its worst annual performance since the 2008 financial crisis. Boeing said last week that it plans to lay off 10% of its employees, equivalent to about 17,000 people.

Rating review

Although Boeing found itself in a protracted crisis, the company's long-term prospects are still very attractive. The aircraft manufacturer and Airbus (EADSY.US) have formed a global duopoly in the large commercial airliner market. Boeing's reserve order includes 5,490 aircraft worth around $500 billion. This will convince investors that once the company resumes production, cash will flow again.

Obtaining this loan shows that banks are still willing to lend to Boeing. But if the company takes advantage of this loan, it will add debt to its balance sheet, which is what it is trying to avoid.

During the pandemic, Boeing fully withdrew the $13.8 billion loan it received to help it cope with its cash consumption. The structure of this loan is a term loan with a deferred withdrawal, which means that the company can borrow this money when needed in the future.

Shortly after, S&P downgraded the aircraft manufacturer's rating. It later sold nearly $10 billion in bonds to refinance loans, then entered into a $5.3 billion revolving credit arrangement.

Boeing said that avoiding being downgraded to junk is a key goal. If the rating is downgraded, the company will become the largest US corporate borrower ever to be stripped of its investment grade rating and added to the junk bond index, injecting a record amount of new debt into the high-yield market.

Financial reports

Two of Boeing's three major credit ratings have been downgraded to junk, which will prevent most of its $52 billion outstanding long-term debt from being included in the investment grade index.

Boeing will announce its results on October 23, local time. This is the first financial report since the new CEO Kelly Ortberg took office. In its preliminary earnings report on Friday, Boeing estimated that the combined pre-tax expenses of its two major business divisions would total about 5 billion US dollars.

In addition to defense and space business expenses, Boeing will also include additional costs for another delay of the 777X model, which will delay the launch of its largest wide-body aircraft by about six years.

Bank of America Securities, Citibank, Goldman Sachs Lending Partners, Goldman Sachs Lending Partners, and J.P. Morgan Chase Bank act as co-organizers and joint book managers for short-term credit agreements. Citibank is the administrative agent, and Bank of America, Goldman Sachs, and J.P. Morgan are joint syndicate agents.