Boeing sold bonds to repay a loan it took out early last year.
Stephen Brashear/Getty ImagesCompanies have been borrowing at a blistering pace over the past year to weather the pandemic. Now, after a difficult year, even Boeing is selling nearly $10 billion in bonds.
The aircraft maker has been hit hard by not only the pandemic—as lower travel demand led airlines to cut capacity—but also safety problems in its 737 MAX jet.
Yet less than one week after posting its largest quarterly loss on record, Boeing (ticker: BA) is coming to market with a sale of bonds maturing in two to five years. The purpose of the offering is to repay a $13.8 billion loan taken out in February 2020 that—along with nearly $30 billion in bond sales last year—helped the company weather troubles with Covid-19 and the 737 MAX.
A bond offering from Apple (AAPL) earlier this week highlighted that it makes sense for companies to sell bonds now and lock in low borrowing costs, as benchmark Treasury yields are expected to rise this year.
The aircraft maker is rated just one tier above junk by S&P Global Ratings and two tiers above junk by Moody’s, while Apple has the second-best rating from both. So there are signs that investors are driving a harder bargain with Boeing than they did with Apple.
Boeing’s bonds all mature in two to five years, meaning that the company has less time before it needs to refinance that debt. But the bonds’ relatively low duration (especially compared with Apple) will reduce investors’ risk of losses if Treasury yields continue to rise.
Second, much like its offering last year, the company is offering a contractual provision that allows for higher coupon payments if it gets downgraded. For each credit-rating downgrade from either S&P or Moody’s, the bonds’ coupons will rise 25 basis points, or hundredths of a percentage point. The bonds will also be callable by the company after one or two years, in case it wants to repay the debt as its cash flow improves.
Early indications were that demand for the offering held up. The bonds priced with yields between 20 to 25 basis points lower than underwriters were originally targeting. And while the company initially offered a three-year floating-rate note, it dropped that part of offering. While that could be because short-term interest rates aren’t expected to rise for a couple of years, it also minimizes the risk that the company will need to pay more if the Federal Reserve’s plans change.
Broadly, the interest from underwriters, investors, and analysts highlights the extent of the comeback in debt markets from their freeze during the pandemic panic—and the amount of risk that investors are willing to take to earn extra returns. CreditSights has a Buy recommendation on the bonds, even though part of their bullish view was based on the expectation for a stock sale at some point soon to raise cash. That may no longer need to happen, however.
“With this issuance we think talk of a possible equity issuance will cool down, as [Boeing] looks at [free cash flow] as the main avenue for deleveraging,” the firm wrote in a Tuesday note.
That is good for Boeing’s shareholders. Raising money in the stock market is good for bond investors, but unpopular among stock investors, as the additional shares dilute their ownership stakes. American Airlines (AAL) announced $1 billion of stock sales last week and its shares have declined since.
And while share issuance increased in January compared with the prior year, bond sales have ticked up as well. Investment-grade companies have sold $160 billion of bonds so far this year, up about 2% from the same period last year, according to Bloomberg.
Boeing’s deal was priced between 1.05 and 1.75 percentage points above Treasuries. Going by Tuesday’s Treasury prices, that means the bonds should pay coupons between 1.2% and 2.2%.
Write to Alexandra Scaggs at alexandra.scaggs@barrons.com
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