Boeing faces worker strikes, production problems and regulatory scrutiny.
To offset the financial collapse, the company is selling $15 billion worth of common stock and mandatory convertible notes. The sale is part of an ongoing initiative to stabilize finances and protect Boeing’s investment-grade credit rating while minimizing dilution to shareholders.
The financing structure allows the company to treat the bonds as equity, hopefully avoiding concerns about leverage, which is a critical factor in maintaining its credit rating.
David Erickson, an associate professor of business at Columbia Business School, expects market analysts to watch Boeing’s latest move closely. Failure to maintain an investment-grade credit rating “can have a significant impact on borrowing costs,” he says.
Boeing’s reliance on hybrid financing involves an attempt to balance cash raising and avoid excessive dilution, Erickson said. “Depending on how the mandatory convertible notes are structured, rating agencies may treat them like shares, which helps Boeing raise significant capital while protecting its credit rating.”
Boeing is raising cash without further expanding its balance sheet. The unique challenges facing the firm have worsened over the past few years, from 737 MAX production delays to new regulatory hurdles. More recently, a workers’ strike cost the company millions of dollars a day, straining its cash flow.
“Boeing’s operational problems are largely self-inflicted, and management changes are exacerbating them, making them worse than typical industry problems,” Erickson says, emphasizing the urgency of the company’s funding. Boeing shareholders receive some protection from immediate dilution because the mandatory convertible notes will convert into shares at a premium. “While convertibles may dilute the stock over time, they give Boeing the breathing room it needs to manage its financial outlook,” Erickson said.