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Boeing sells US$3.5b of bonds as 737 Max scrutiny deepens
[NEW YORK] Boeing Co borrowed in the bond and loan markets after two deadly plane crashes forced the company to scale back production of its most profitable aircraft and cut into cash flow.
The aircraft manufacturer sold US$3.5 billion of senior unsecured bonds, a person with knowledge of the matter said on Tuesday, and separately tapped its banks for a US$1.5 billion short-term loan, according to a filing.
The combined financing is the company's biggest since its 737 Max plane crashed in Ethiopia in March, marking the second time the jet had gone down in the span of five months.
Regulators worldwide grounded the plane after the latest crash, preventing Boeing from delivering new 737 Maxes to airlines. Most payment for an aircraft comes at the time of delivery, so the grounding is weighing on the company's cash flow, and Boeing has abandoned its 2019 financial forecast.
To reduce spending and preserve cash, the company cut production of the 737 jetliner for the first time since the Sept 11 attacks.
Boeing's latest borrowing signals that it's looking to boost its liquidity as the 737 Max grounding drains its cash over the next two quarters, CreditSights analysts wrote in a note on Tuesday. The company's operating cash flow will probably only break even in the second quarter if Boeing doesn't resume deliveries on its 737 Max, Seth Seifman, an analyst with JPMorgan Chase & Co, said in a note to clients last week after the company posted first-quarter results.
Any decline in cash flow may reverse when deliveries resume, CreditSights analysts including Ashwin Tiruvasu wrote. The company is still a "fundamentally solid credit," they said. Boeing earned US$2.15 billion in the three months ended March 31, a 13 per cent decline from the same period last year.
Tuesday's bond offering came in five parts. The longest portion, 30-year securities, will yield 1.07 percentage points above Treasuries, after initial talk of around 1.25 percentage points. The securities were generally being offered at yields above the current levels for Boeing's outstanding debt, which is typical for a new bond sale. Proceeds of the sale will be used for purposes including repaying debt, buying back stock, acquisitions and capital expenditure, said the person, who asked not to be identified as the details are private.
Boeing had more than US$15.5 billion of debt outstanding at the end of March. It successfully approached capital markets soon after the first fatal crash, a Lion Air flight in Indonesia in October. The company was able to sell US$700 million of bonds the same day, with orders equal to nearly seven times the bonds for sale. It also sold US$1.5 billion of bonds in February.
"It's a sign of strength from management to be able to access capital markets," said Jon Duensing, director of investment-grade credit at Amundi Pioneer. "Yes, there's uncertainty around one business line, but there are a number of others that still operate at a very high level."
Citigroup Inc, Bank of America Corp, BNP Paribas SA, JPMorgan Chase & Co, Mizuho Financial Group Inc, Societe Generale SA, Mitsubishi UFJ Financial Group Inc, Credit Agricole SA, Sumitomo Mitsui Banking Corp, Goldman Sachs Group Inc and Wells Fargo & Co managed the sale, the person said.