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Insights

Boeing bonds bound to bounce back?

Gregory Turnbull Schwartz
Senior Analyst, Fixed Income

Key Takeaways

  • Despite a difficult period, the business retains good access to liquidity, has in-demand products and benefits from its position in an oligopolistic market structure
  • With nearly $60 billion of outstanding corporate bonds, it is among the largest non-financial issuers in the USD investment grade market, and wants to reduce its leverage
  • Given the state of Boeing’s production lines and related cash generation, this is unlikely anytime soon – although it could look much improved in 12-18 months
  • With product safety a critical driver of bond spreads, and the potential risk of airplane failure (regardless of fault), investors have a decision to make

Boeing is an iconic name. It enjoys high levels of political support in the government of its single largest customer, the United States.1 It produces the president-carrying Air Force One, makes the ubiquitous commercial airliners, influences space exploration, produces military equipment and maintains significant nuclear capabilities for the US. This relationship is a substantial pillar of support for the credit.

But Boeing has had a tumultuous few years. The company clearly has significant room for fundamental improvement, and hardly a week passes without it being in the news. However, it also has the benefit of substantial liquidity, products which are very much in demand, and a privileged position within an oligopolistic market structure (alongside Airbus). This presents active investors with a material opportunity.

Boeing maintains in excess of $10 billion of cash on its balance sheet, as well as bank lines of $10 billion. In 2024 it has used significant amounts of cash as it slowed its delivery schedules, built up inventory in anticipation of soon being able to operate at significantly higher rates of production, and experienced some reluctance from customers to make cash payments without greater clarity over the delivery schedule. It has also raised $10 billion in the bond market.2 Management has come a long way in its thinking since January, speaking openly about raising capital by issuing shares if that were necessary to retain its investment grade credit rating. Because of the high demand and the lack of an alternative, we think it could receive funding from either the bond or equity markets.

Another worry for Boeing management and stakeholders is the dispute between the firm and the International Association of Machinists and Aerospace Workers.3 At the time of writing we do not know the impact of the strike. Boeing is highly motivated to make it short – a stance that is known to negotiators on both sides, which makes this a difficult situation. As company analysts we call this a “known” risk factor and evaluate it in the context of a company whose financial metrics are not going to be the near-term driver of bond performance, with or without the labor dispute. Ultimately the strike is a question of cost, and Boeing will have to assess that cost versus the cost of delay and of issuing equity.

As Boeing’s management has said it would defend its investment grade rating with equity issuance if necessary, we think the economic incentives are consistent with that pledge. Beyond the short term, there is far greater demand for Boeing’s products over the next couple of years than the company can satisfy. Its total backlog of orders was more than $500 billion as of the end of 2023. The order book for the 737 Max is in excess of 4,700 planes, and the firm produced just under 400 in 2023.4 Not only are Boeing’s planes in very high demand, but its main competitor Airbus has a similar situation vis-à-vis its customers and commercial planes.

So, Boeing has more than enough orders to keep it busy for a long time, and its customers cannot readily leave and get their planes elsewhere. This unusually benign supply/demand situation is beneficial for Boeing’s bonds. With about $60 billion of outstanding corporate bonds5, Boeing is among the largest non-financial issuers in the USD investment grade market.

Investment questions

Something we debate is how to manage the potential risk that another Boeing aeroplane experiences a material problem. Commercial planes are fiendishly complex, and there are thousands of them in the sky at any given moment. Equipment can fail for a multitude of reasons including manufacturing problems, equipment maintenance and operation, and latent defects in materials. A manufacturer or airline could execute very well in all aspects under its control, and yet a plane could still experience a failure. As company analysts we call this an “unknown” risk factor.

In the case of Boeing, product safety is a critical driver of bond spreads. We have to balance our understanding of measures the company has taken to improve its safety outcomes versus the possibility that one of its planes suffers a major accident – regardless of fault. We weigh this issue, and the level of compensation the bonds offer, relative to what else we know about the company and relative to alternative investment opportunities.

Other key drivers of bond spreads include demand for products, competition and market share, and decisions of management to increase debt in order to either invest substantially more in capital expenditures, buy a competitor, or buy back its own company shares. Each of the items on this non-exhaustive list could cause the bonds of a company to significantly underperform the broader market. For Boeing, we believe none of these non-safety items has a meaningful probability of harming bondholders in the next few years. So, although there is a substantial unknown that we must factor into the investment case, there is much greater certainty about other aspects than we would normally have.

So, how to weigh this all up? We have a process based on independent and critical thinking. It encourages and facilitates candid, collaborative discussions among teammates with significant experience in their areas of expertise, as well as substantial time working together. We have procedural mechanisms like meetings and other formal communication methods. But the real value-add in complex investment situations is the ability to have meaningful conversations, which lead to enhanced situational understandings used in portfolio construction and position management.

Boeing has recently announced a new CEO.6 Its factories have been under intense, on-site scrutiny for a long time – from its customers as well as the Federal Aviation Administration. Because Boeing sells items with long shelf lives, and because the market structure means customers have very little flexibility about where they get their planes, we expect it to eventually deliver on its orders. With a commercial backlog of more than $400 billion, that represents a significant amount of future cashflow and debt repayment capacity.

Many investors talk about their long-term investment philosophy and deep understanding of the companies in which they invest; Boeing may be the perfect case study for understanding to what degree this is true.

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Boeing bonds bound to bounce back?

1 The US government accounted for 35%-45% of Boeing’s revenue from 2021-23. Source: Boeing Annual Report 2023 Form 10-K, 27 January 2023
2 Reuters, Boeing taps debt market to raise $10 billion, sources say, 29 April 2024
3 FT.com, Boeing workers begin strike after rejecting 25% pay rise, 13 September 2024
4 Boeing, Boeing Reports Fourth Quarter Results, 31 January 2024
5 Bloomberg and company accounts
6 Boeing, Boeing Board Names Kelly Ortberg President and CEO, 31 July 2024

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other person should act upon it. This document and its contents and any other information or opinions subsequently supplied or given to you are strictly confidential and for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of CTIME. By accepting delivery of this presentation, you agree that it is not to be copied or reproduced in whole or in part and that you will not disclose its contents to any other person.

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other person should act upon it. This document and its contents and any other information or opinions subsequently supplied or given to you are strictly confidential and for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of CTIME. By accepting delivery of this presentation, you agree that it is not to be copied or reproduced in whole or in part and that you will not disclose its contents to any other person.

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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