S&P Global Ratings warns on potential Boeing ratings downgrade

written by australianaviation.com.au | July 30, 2019
A file image of a Boeing 737 MAX 8 tail and winglets. (Boeing)
A file image of a Boeing 737 MAX 8 tail and winglets. (Boeing)

S&P Global Ratings says it may lower its credit rating for Boeing due to the turmoil over the grounded 737 MAX.

The ratings agency said in a statement on Monday (US time) Boeing’s credit metrics were very likely to deteriorate over the next few quarters and “could temporarily fall below our downgrade trigger” of a funds from operations to debt ratio of less than 40 per cent.

However, S&P Global Ratings said it still believed “its ratios will likely improve to levels appropriate for the current rating by the end of 2020”.

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Earlier in July, Fitch Ratings and Moody’s Investor Service lowered their outlook for Boeing to negative amid the ongoing uncertainty over the return to service of the 737 MAX.

The global grounding of the 737 MAX following the fatal crash of an Ethiopian Airlines Boeing 737 MAX 8 in March – the second fatal accident involving the aircraft in six months following the Lion Air crash in October 2018 – has taken a heavy toll on Boeing’s bottom line.

On July 24, Boeing reported a net loss of US$2.94 billion for the three months to June 30 2019, slumping into the red from net profit of US$2.20 billion in the prior corresponding period. Revenue fell 35 per cent to US$15.75 billion.

It was the largest quarterly loss in the company’s history and the first quarterly loss in a decade.

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The result was impacted by a previously announced after-tax charge of US$4.9 billion in relation to the grounding of the 737 MAX.

Currently, Boeing has submitted a software update to an anti-stall feature implicated in the two tragedies to the United States Federal Aviation Administration (FAA), as well as updated training procedures, as part of efforts for the recertification of the aircraft.

The company was also continuing to address a software issue the FAA found when evaluating Boeing’s software fix for the grounded 737 MAX.

While Boeing based its second quarter financial results on the assumption that regulatory approval in the United States and elsewhere would begin early in the fourth quarter of calendar 2019, the company stressed the actual timing and conditions of the return to service of the 737 MAX would be determined by the regulatory authorities and could differ from its own forecasts.

The company has also halted deliveries of the 737 MAX and slowed the production rate to 42 a month, from 52 a month prior to the grounding.

Grounded Boeing 737 MAX aircraft at Boeing Field in Seattle, Washington State. (Wikimedia Commons/SounderBruce)
Grounded Boeing 737 MAX aircraft at Boeing Field in Seattle, Washington State. (Wikimedia Commons/SounderBruce)

“If any of the timeline assumptions change significantly from a start of the fourth quarter return to service, then we’ll have to evaluate alternatives,” Boeing chief executive Dennis Muilenburg said during the company’s second quarter results presentation.

“And those alternatives could include different production rates. They could include a temporary shutdown of the line, not something we want to do, but an alternative that we have to prepare for, I think it’s a smart part of our thorough and disciplined process here to make sure we’re covering all scenarios.”

S&P Global Ratings, formerly known as Standard & Poor’s, said it “could lower our rating on the company if we believe the damage to its financials is more lasting than we expect or that the MAX will suffer a substantial loss in market share”.

“And, we could revise our outlook on the rating if the risk of those outcomes increases,” S&P Global Ratings said.

“We will also consider the risks and potential implications of halting deliveries or more of substantial delays in a return to service.”

Boeing said in a regulatory filing to the United States Securities and Exchange Commission (SEC) it planned to raise funds through the issuing of notes later in 2019.

The proceeds would be to “fund our previously announced joint venture with Embraer that we expect to close in the fourth quarter of 2019″ and for “general corporate purposes”, the filing said.

The notes sold would be redeemable in 2021, 2027, 2030, 2035, 2050, and 2059.

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