Boeing Rules Out Federal Aid After Raising $25 Billion of Bonds

(Bloomberg) -- Boeing Co. sold $25 billion of bonds in the largest offering this year, eliminating the need for more cash as the coronavirus pandemic upends the global aviation industry.

The planemaker won't seek additional funding through the capital markets or U.S. government aid at this time, according to a company statement late Thursday after the debt sale. Executives had indicated on an earnings call Wednesday that Boeing was tapping some of the tax relief available through the CARES Act and exploring several financial vehicles offered by the Federal Reserve as well as Treasury Department loans.

The company burned through the most cash ever in the first quarter with travel at a standstill. Boeing was already hurting from the grounding of the 737 Max before the Covid-19 outbreak, but it's looking to shore up liquidity even further by cutting jobs and production.

Boeing has fully drawn on a nearly $14 billion term loan, and Thursday's bond sale will add even more cash as the company received $70 billion of orders at the peak, a person with knowledge of the deal said. Boeing was originally targeting at least $10 billion of new debt, Reuters reported earlier this week.

The debt offering caps off another record month for U.S. investment-grade issuance, surpassing March's $259 billion. Companies have been borrowing at a rampant pace since the Federal Reserve pledged unprecedented support to the credit markets, and strong demand has brought borrowing costs down toward pre-pandemic levels.

Read more: Boeing, IBM to Catapult U.S. Bond Sales to Another Record Month

The extra liquidity provides “solid upside” to Boeing's stock, Bernstein analysts led by Douglas Harned said in a report Thursday. Its bonds, however, have traded lower, with debt maturing in 2050 and 2059 quoted at less than 80 cents on the dollar, according to Trace. Notes due next year are trading close to par.

The debt offering enables Boeing to avoid any strings attached from federal aid, such as compensation limits and an equity stake for the government. But some of the company's suppliers may still need help.

“We believe that government support will be critical to ensuring our industry's access to liquidity,” Boeing Chief Executive Officer Dave Calhoun said Wednesday.

The debt was sold in seven parts, according to people familiar with the matter. The longest portion, a 40-year security, yields 4.625 percentage points above Treasuries, after first discussing around 5.5 percentage points, the people said, asking not to be identified as the details are private.

Those initial risk premiums are more in line with junk-rated companies, and will “get the greed juices flowing,” said David Knutson, head of credit research for the Americas at Schroder Investment Management, said earlier Thursday.

“It is almost paradoxical that companies with little to no income or a very hazy outlook would have substantial access to capital markets,” he said. “Despite the worst economic contraction in history, the debt markets are wide open.”

Companies have been taking money wherever they can as rampant demand for U.S. corporate debt has often allowed borrowers to boost the size of their offerings and cut the interest rate. Oracle Corp. was said initially target $10 billion in its bond sale last month that ended up doubling in size, and T-Mobile US Inc. followed a similar path a few days later. Those were the largest deals of the year before Boeing took the top spot.

Read more: Boeing Jumps After Job, Output Cuts Reveal Plan for Virus Era

Boeing is betting its balance sheet strength and access to capital will see it through the current crisis. Chief Financial Officer Greg Smith told investors in reporting earnings Wednesday the company is committed to maintaining investment-grade ratings, but ultimately that's up to the market to decide.

S&P Global Ratings cut the company to one level above junk with a stable outlook, while Moody's Investors Service and Fitch Ratings are one step higher with negative outlooks. Boeing included a provision in its bond sale that pledges to increase the interest rate for each downgrade into speculative grade.

Fitch rated the new bonds BBB, though the rater doesn't expect global aviation markets to return to 2019 levels until 2022, and in some cases 2023, analysts Craig Fraser and Nicholas Varone said in a report Thursday. Boeing should be able to rebuild its credit metrics to levels consistent with the BBB rating within the next two years, they said.

Read more: Boeing and Bond Traders Brace for Junk: Sutherland and Chappatta

Boeing burned through $4.7 billion of cash in the first quarter, which could quadruple by year-end and continue into 2021 as the pandemic and global recession sap demand for plane sales, Barclays analyst David Strauss said in a note to clients Thursday.

Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. managed the sale, the person said.

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