U.S. airline giant Boeing (NYSE: BA) is slated to sell US$5.5bn worth of corporate bonds, as the company piles on more debt despite its aim to bolster liquidity.

The Chicago-based airliner said it intends to use proceeds from the sale to help fund the joint venture it formed with Brazilian aerospace firm Embraer (NYSE: ERJ) earlier in July.

Under the non-binding agreement, Boeing will hold an 80% ownership stake in Embraer’s commercial aircraft and services business – a value of around US$3.8bn. Embraer will hold the remaining interest in the JV, which has a total valuation of roughly US$4.75bn.

Boeing said the proposed partnership is expected to be accretive to its earnings per share beginning in 2020 and to generate estimated annual pre-tax cost synergies of about US$150m by year three.

The transaction is expected to close in the fourth quarter of 2019.

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Meanwhile, Boeing’s latest bond issuance, which has maturities that range from 2- to 40-years, will add 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, potential new mid-market airplane (NMA) launch, and several planned production rate increases, as well as various lawsuits and investigations tied to 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.”

While Boeing said it is “working very closely” with the Federal Aviation Administration (FAA) on the needed software updates to safely return the MAX to service, it was uncertain of the timing.

It added that regulatory authorities will “determine the process for certifying the MAX software and training updates as well as the timing for lifting the grounding order.”

In the meantime, the carrier earlier in July recorded a 737 MAX-related charge of US$4.9bn, which helped fuel a loss of US$5.82 a share in the second-quarter 2019, with revenue having plunged 35% from the same year-ago quarter to US$15.8bn. Its US$2.9bn net earnings loss was reportedly its worst on record.

Boeing CFO Greg Smith recently said the company is taking “appropriate steps to manage our liquidity and increase our balance sheet flexibility the best way possible as we are working through these challenges. Our multi-year efforts on disciplined cash management and maintaining a strong balance sheet, in addition to our strong and broad portfolio offerings, are helping us navigate the current environment.”

Liquidity

As of June 30, 2019, Boeing’s liquidity was in the area of US$13.2bn, including US$9.2bn in cash and marketable securities, as well as a US$3.6bn revolving credit facility. The company has more than US$6.5bn of loans available to draw-down.

The firm’s consolidated debt amounts to US$19.2bn, with a host of maturities over the next year, which Fitch calculates debt-servicing at around US$1.7bn annually through 2021.

Moreover, free cash flow was in the area of US$9.6bn in 2018 and is likely to remain around the US$9bn mark, amid build-up of working capital related to its 737 MAX.

To date, the attractive liquidity position likely helps to keep perceptions about Boeing’s creditworthiness solidly in positive territory.

Five-year credit default swap spreads (CDS) on the company, for example, have tightened by around 1.2 basis points over the past three months to just north of 46.15bps.

Fitch, along with Standard & Poor’s, each assigned an investment-grade ‘A’ rating to Boeing’s US$5.5bn bond deal, while Moody’s Investors Service rated the deal ‘A2.’

Supply and Demand Factors Intact

Boeing’s bond issuance, which is supported by still-low U.S. interest rates, comes ahead of the conclusion to the Federal Reserve’s Open Market Committee policy decision Wednesday, when market participants widely expect the central bank to cut rates by 25bps – the first time in about a decade.

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Issuers of high-grade corporate bonds are likely to rush to market ahead of the Fed’s decision, with most syndicate managers anticipating around US$25bn in new deals in the week ahead.

Ron Quigley, head of fixed income syndicate at Mischler Financial, noted that investor “demand for new IG credit product remains very strong as credit spreads continue tightening.”

For the week ended July 24, Thomson Reuters/Lipper U.S. Fund Flows reported a net inflow of roughly US$2.48bn into investment-grade corporate bond funds, while high yield funds posted net inflows of around US$1.31bn.

Against this backdrop, a total of almost US$28.6bn of new issuance priced last week – over 35.4% more than most syndicate managers expected, contributing to just north of US$78bn of investment-grade corporate bonds to date in July.

Boeing’s bond sale should meet with decent interest, as high-grade corporate debt continues to attract global demand for the yield offered in the U.S. primary market – especially among those bond buyers who have been priced out of their local markets or have a dearth of available paper.

The yields on 10-year Japanese and German government bonds, for example, were last bid in the areas of –0.156% and -0.395%, respectively, while the yield on the 10-year U.S. Treasury note was around 2.05% intraday Monday.

Against this backdrop, the yields on Boeing’s 3.2% notes due March 2029 have fallen to around 2.818% from a 52-week high of 3.479% set in mid-March. This also coincides with a fall of around 55bps in the yield of the 10-year U.S. Treasury note.

Bond investors will likely be watching for any developments related to Boeing’s 737 MAX return, as well as a myriad of geopolitical risks lining the landscape that could affect appetite for riskier assets, including U.S.-China trade negotiations, Middle East volatility, and progress with Brexit.