Boeing is in talks to borrow $10 billion or more as 737 Max crisis wears on
- Boeing is in talks with banks to secure a loan of $10 billion or more, according to people familiar with the matter, as the company faces rising costs stemming from two fatal crashes of its 737 Max planes.
- Boeing this month suspended production of the troubled planes this month as the grounding stretches into its 11th month, a planned pause in production that has rippled through the supply chain and already cost thousands of jobs
- Banks that have already committed to contribute to the loan include Citigroup, Bank of America Merrill Lynch, Wells Fargo and J.P. Morgan, people familiar with the matter said.
Boeing is in talks with banks to secure a loan of $10 billion or more, according to people familiar with the matter, as the company faces rising costs stemming from two fatal crashes of its 737 Max planes.
The company has secured at least $6 billion from banks so far, the people said, and is talking to other lenders for more contributions. The total amount could rise if there is additional demand from banks, one person familiar with the matter said.
Liquidity isn't an immediate concern, analysts have said, but the new debt shows Boeing is shoring up its finances amid the cash-sapping fallout of the two crashes — one in Indonesia in October 2018 and another in Ethiopia in March last year — that killed all 346 people aboard the two flights.
The amount Boeing is seeking to borrow is more than what some analysts were expecting. For example, Jefferies earlier this month forecast Boeing would issue $5 billion in debt this quarter.
But the jets' return has faced potential new delays that are threatening to drive up Boeing's costs, including a new software issue disclosed by the company last week.
Boeing this month suspended production of the troubled planes this month as the grounding stretches into its 11th month, a planned pause in production that has rippled through the supply chain and already cost thousands of jobs. However, Boeing earlier this month said it didn't plan to lay off 737 Max workers and said they would be reassigned to other functions.
The company also reversed its stance and will now recommend pilots undergo simulator training, a time-consuming and costly process, before the jets can fly again.
The company posted negative orders for aircraft last year, its weakest sales figures in decades, and handed the title of the world's biggest aircraft manufacturer over to its European rival Airbus.
Boeing has developed a software fix for the planes after a flight-control system was implicated in the crashes but regulators have not yet signed of on that or completed other checks that would allow them to certify the planes as safe to resume operations.
Boeing declined to comment on the debt raise.
Moody's Investors Service last week said it was putting Boeing's credit rating, which is investment grade, on review for a potential downgrade due to the Max issues.
"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," wrote Jonathan Root, Moody's lead Boeing analyst.
Boeing had about $25 billion in total debt at the end of the last quarter, up from around $19 billion at the start of the three-month period, the company said.
The loan Boeing is negotiating will be a two-year, delayed-draw loan, meaning Boeing can tap into it later, a move that may not immediately affect its credit rating as another type of loan or a bond would, according to one of the people familiar with the matter. J.P. Morgan estimates the grounding will still cost Boeing about $1 billion a month even after the planned production shutdown.
The new loan would come as Boeing is trying to close its $4 billion acquisition of a majority stake in Embraer's commercial plane business. The company has also continued to pay investors dividends during the crisis.
Banks that have already committed to contribute to the loan include Citigroup, Bank of America Merrill Lynch, Wells Fargo and J.P. Morgan, people familiar with the matter said.
Boeing's temporary production shut down of the planes, which had been its best-selling aircraft, is hurting its supply chain. Spirit AeroSystems, which makes fuselages and other parts for the 737 Max, said earlier this month it would lay off 2,800 workers.
Moody's downgraded Spirit to junk territory last week, saying it "reflects our expectation 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."
General Electric, which makes engines for the planes through a joint venture with France's Safran, has laid off 70 temporary workers in Quebec, but it could hire them back later.
Suppliers are in a tough position because they want to have skilled workers in place for a resumption in production.
GE, which reports earnings at the end of the month and also makes engines for Airbus planes, can move workers to other plants and programs. The company is also considering reducing worker overtime, according to a person familiar with the matter.
The 737 Max issues have cost airlines more than $1 billion in lost revenue, and Boeing took a $5.6 billion pre-tax charge last July to compensate its Max customers for the grounding and analysts expect it to report another this month.
While the company has reached compensation agreements with airlines including American and Southwest, those agreements apply only to revenue lost in 2019 and analysts expect Boeing will have to pay more without a firm date to get the planes back in the air. American, Southwest and United have all pulled the plane from their schedules until June.
Investors will hear more on the impact of the grounding from the carriers when they report earnings later this week and when Boeing reports on Jan. 29.