Why Boeing's bonds are a hot item right now, unlike its stock

By Ciara Linnane and Claudia Assis

Spreads on Boeing's debt have tightened since the machinists' union strike

Boeing Co.'s stock fell on Tuesday after the latest setback in efforts to come to an agreement with striking workers, but the company's outstanding bonds are moving in a different pattern.

Boeing's stock (BA) has taken a downturn since the company's machinists started a strike on Sept. 13 over pay that led Moody's Ratings to place the aerospace giant's credit on review for a possible downgrade.

The strike comes at a challenging time for the company, which is trying to turn itself around following a series of production missteps. The stock is down 12% this month.

Fitch Ratings also expressed concern about the strike, noting the company's rating "has limited headroom for a strike" - especially for an extended one. S&P Global Ratings said it didn't expect the strike to impact its rating, at least for now.

All three rating agencies have Boeing's credit at the lowest rung of investment grade. The company has $45 billion of debt, which would be more expensive to service if it were downgraded to junk. It would also shut the bonds out from a much bigger pool of investors, including pension funds, that can only own investment-grade debt.

Against that background, it may seem surprising that spreads on the outstanding bonds have actually tightened since the strike started, even as investors have been sellers, especially of longer-dated notes, on strong volumes.

So what's going on?

"The short answer is, it's the market strength," said CreditSights analyst Matt Woodruff.

Since the Boeing strike began, the investment-grade market has tightened by 7 basis points and the high-yield market has tightened by 15 basis points. That's thanks to the Federal Reserve's 50 basis-point interest-rate cut and the market thinking a "soft landing" for the U.S. economy is now possible, he said.

"For Boeing specifically, the market believes it will issue equity following the strike, and that could potentially keep the agencies happy with BBB- ratings," Woodruff said. "We believe it is not clear Boeing will be able to issue enough equity to make the agencies happy, though."

The following charts from data solutions provider BondCliQ Media Services illustrate the trend. The yellow oval highlights the focus on longer-dated bonds.

The next chart shows the movement in spreads, which reflects both the strong credit market and the power of recently issued bonds that will pay out more if the credit is downgraded.

Bonds that were issued in May came with built-in coupon step-up features that add 25 basis points to the coupon for each notch of a potential downgrade. If Moody's and S&P Global Ratings downgrade the credit, holders of those bonds would receive an extra 50 basis points of coupon.

The 3.95% notes that mature in August of 2059 have seen the most tightening, at 13 basis points.

Boeing said Monday it had made a "best and final offer" to striking machinists that includes bigger raises and larger bonuses, but the workers' union said the proposal isn't good enough and there won't be a ratification vote before Boeing's deadline at the end of the week, as the Associated Press reported.

The union griped that Boeing publicized its latest offers to 33,000 striking workers without first bargaining with union negotiators.

"Boeing does not get to decide when or if you vote," leaders of the International Association of Machinists and Aerospace Workers District 751 told members Monday night. "The company has refused to meet for further discussion; therefore, we will not be voting" on Friday, as Boeing insisted.

The new offer is more generous than the one that was overwhelmingly rejected earlier this month. The company said the offer includes pay raises of 30% over four years, up from 25% in the first proposal. The union originally demanded 40% over three years.

Boeing has introduced furloughs of non-unionized workers to preserve cash as the strike continues.

The stock has fallen 41% in the year to date, while the S&P 500 SPX has gained 20%.

-Ciara Linnane -Claudia Assis

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09-25-24 0742ET

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