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Rating Action:

Moody's assigns A2 ratings to Boeing's new unsecured notes

30 Apr 2019

New York, April 30, 2019 -- Moody's Investors Service, Inc. assigned A2 ratings to The Boeing Company's new senior unsecured notes announced earlier today. Boeing will use the proceeds for general corporate purposes, which we believe could include terming out commercial paper borrowings, which stood at $1.992 billion at March 31, 2019. The company plans to issue across five tranches with maturities of three, seven, 10, 15 and 30 years, with the 10 year portion being a reopening of the company's 3.2% senior notes that were issued on February 15, 2019. The current A2 senior unsecured rating and stable outlook are unaffected by this rating action.

RATINGS RATIONALE

The A2 senior unsecured rating reflects Boeing's position as one of two manufacturers of large commercial airplanes and a prime US defense contractor. The company's backlog provides long-term revenue visibility. Backlog was $399 billion and $87 billion for commercial aircraft and the rest of the business, respectively at March 31, 2019. The commercial aircraft backlog declined by about $8 billion since December 31, because of the removal of the order from Jet Airways. With about 5,600 commercial aircraft on order, annual production rates should remain above 850 units for years to come. These higher production rates will support strong operating cash flow that will be needed to help fund a multi-billion investment for the new commercial airliner it is studying, the New Market Aircraft, if it decides to launch the program. Boeing has excellent liquidity at this time through cash, revolving credit facilities and expected free cash flow, which will provide some cushion as the company manages through the grounding of its MAX narrow-body aircraft and addresses potential costs associated with the grounding that may come following the aircraft's return to service.

The FAA grounded the MAX on March 13, 2019, following groundings by a number of other countries' aviation authorities after the crash of Ethiopian Airlines Flight 302 on March 10, 2019. Boeing's main focus is restoring the MAX' flight status. Needed improvements to the model's flight management software should be completed imminently. FAA test flights to certify the updated software are also expected to occur the week of April 29. On April 19, the US Federal Aviation Administration (FAA) announced that it will lead a Boeing 737 MAX Joint Authorities Technical Review (JATR), which will start on April 29 and that it expects the JATR to take 90 days. Aviation authorities from at least eight countries, including China's Civil Aviation Authority, from Europe's European Aviation Safety Agency (EASA) and NASA will participate and a former head of the US National Transportation Safety Board will chair the group. Nonetheless, each regulator that grounded the aircraft will need to lift its respective grounding order for the MAX aircraft to return to service in that regulator's region. American Airlines Group, Inc., Southwest Airlines Co., and United Continental Holdings, Inc., each indicated in their 2019 Q1 earnings calls that they expect the FAA to lift the grounding on or before the end of July 2019.

At $15.3 billion and $9.6 billion of operating cash flow and free cash flow, respectively in 2018, the cash production of Boeing's franchise is formidable. Moody's anticipated increases in both cash flow measures in 2019 and again in 2020 before the MAX' grounding because of planned increases in commercial aircraft production as well as growth of the defense and services businesses, which together produced $40 billion of annual revenue and about $12 billion of operating profit on a segment basis in 2018.

The grounding will delay receipts of cash for aircraft deliveries. This cash could be recovered within about 12 months following the restoration of the MAX's flight status, as Boeing clears the backlog of manufactured but not delivered 737 MAXes.

Accurate detailed estimates of potential financial exposure are difficult to make. The company will face increased or extraordinary costs on a number of fronts, including: 1) engineering, certification and possibly training costs, 2) increased production costs including tied to the lowering of the monthly production rate of the 737 line to 42 from the then current 52, 3) support costs for suppliers, many of which, including Spirit Aerosystems, Inc. are maintaining their respective production rates at 52 per month, 4) general and administrative costs, including crisis management, legal fees, and government investigations and hearings, 5) storage costs for completed 737s awaiting delivery, 5) marketing campaigns to support the re-introduction of the aircraft into service following the lifting of the grounding across countries, 6) potential compensation to airlines for delayed deliveries and or loss of use during the grounding, 7) payments related to litigation that arises from the two crashes, and 8) potential payments related to investigations covering the original FAA certification of the MAX model.

Boeing booked a $1 billion charge to the 737 program in its financials for the 2019 first quarter. The costs that comprise this charge will flow through the bookkeeping for the 737 program, effectively being spread over all future deliveries. The current 737 order book stands at about 4,400 aircraft.

The stable outlook reflects Moody's expectation of higher earnings, operating cash flow and free cash flow, with passing quarters after the resolution of the MAX's grounding and through at least 2021. The stable outlook also reflects Moody's expectation that Boeing will not repurchase any more of its shares in 2019, nor in 2020 if the current investigations by various US government entities are still not resolved, the company's financial exposure is known and the company clears the MAX delivery backlog. Moody's expects credit metrics to weaken in 2019 because of the grounding. However, it expects metrics to recover to close to year-end 2018 levels in 2020, assuming the grounding is resolved during 2019.

A downgrade of the ratings could occur if the grounding is expected to extend well into 2019 or if financial penalties related to investigations meaningfully limit the company's run rate annual free cash flow. Following the resolution of the grounding and investigations, 1) returns to shareholders that repeatedly exceed free cash flow; 2) being unable to win major profitable DoD contracts or 3) sustaining unrestricted cash below $5 billion, retained cash flow to net debt below 25%, EBIT to interest expense below 6x, EBITA to average assets below 10%; and or debt to EBITDA above 2.8x could lead to a negative rating action. The inability to strengthen the execution of its manufacturing and quality across its commercial and defense programs could also pressure the ratings.

There will be no upwards pressure on the ratings until after the MAX grounding is resolved and its related effects are known. Additionally, Boeing will need to strengthen the execution of its manufacturing and quality programs across its commercial aircraft and defense manufacturing programs before Moody's would consider upgrading its ratings.

The principal methodology used in these ratings was Aerospace and Defense Industry published in March 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The Boeing Company is a leading large commercial airplane manufacturer and one of the largest prime contractors for aircraft and related systems to the US Department of Defense. The company operates in three principal business segments: Commercial Airplanes; Defense, Space & Security; and Global Services. Headquartered in Chicago, Illinois, Boeing reported $101.1 billion of revenue for 2018.

Assignments:

..Issuer: Boeing Company (The)

....Senior Unsecured Regular Bond/Debenture, Assigned A2

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jonathan Root, CFA
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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