Boeing Investors Brace For Impact Of 737 MAX Suspension

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Holders of some of Boeing’s bonds have likewise suffered losses.

The company’s 2.95% notes due February 2030 were recently quoted bid at around US$101.614, down from US$102-24 when they were initially priced. The fall in the value of the notes comes despite a decline of around three basis points in the yield of the 10-year U.S. Treasury note, which was last bid at around 1.866%.

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Mounting concerns

Boeing’s latest US$5.5bn bond issuance, which has maturities that range from 2- to 40-years, added to a debt pile that could exceed US$24bn before the end of 2019, according to Fitch Ratings. While the figure incorporates nearly US$10bn of new debt estimated to be sold this year, built-up working capital related to its 737 MAX grounding could tip the total debt scale higher.

Fitch continued that Boeing also faces a long list of other concerns, including 777X development, a potential new mid-market airplane (NMA) launch, and several planned production rate increases, as well as various lawsuits and investigations tied to the two recent fatal 737 MAX crashes. 

The ratings agency further expects “there will be a lingering operating margin impact for several years after the 737 MAX returns to service.”

In the meantime, the U.S. aviation industry has not been entirely kind to shareholders, as evidenced by shares of the U.S. Global Jets exchange-traded find (ETF / NYSEARCA: JETS), which has among its top holdings Delta Air Lines (NYSE: DAL), American Airlines (NASDAQ: AAL) and Alaska Air Group (NYSE: ALK – Boeing in 2018 had touted Alaska Airlines as a “Supplier of the Year”).

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In fact, JETS has returned about 14.4% year-to-date in 2019, about half of the S&P 500’s 27% gains over the same period.

Market participants will likely be eyeing the extent of the impact from Boeing’s 737 MAX production suspension in late January 2020, when it is slated to release its fourth quarter of 2019 earnings results.

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The author does not hold any positions in the financial instruments referenced in the materials provided.

Disclosure: The analysis in this ...

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