Fitch Rates Boeing's Proposed Senior Unsecured Notes 'A'

NEW YORK & CHICAGO—(BUSINESS WIRE)—Fitch Ratings expects to assign an ‘A’ long-term rating to The Boeing Company’s (BA) proposed issuance of approximately $850 million of senior unsecured notes. The notes will be issued in three parts, with maturities of 2017, 2021, and 2024. Proceeds will be used for general corporate purposes, including funding of Boeing Capital Corporation (BCC).

The Rating Outlook is Stable. The ratings cover approximately $9.1 billion of debt ($7.25 billion at BA and $1.85 billion at BCC), pro forma for today’s issuance, recent maturities, and near-term maturities. A full list of ratings is included at the end of this release.

Fitch notes that BCC had $500 million of debt mature on Oct. 27, with an additional $150 million maturing next week. Today’s issuance will continue the shift of external debt to the parent’s balance sheet and away from BCC following Boeing’s full guarantee of BCC’s outstanding public debt in early 2013. Fitch expects some of the proceeds of today’s issuance could be lent to BCC by BA.

Key Rating Drivers

The Stable Outlook reflects Boeing’s financial flexibility, liquidity, and backlog. A Positive Outlook could be driven by continued improvement in Boeing’s credit profile from higher commercial aircraft deliveries, further progress on 787 program risk retirement, U.S. defense spending stabilization, debt reduction, and pension contributions. Several initiatives to boost margins, if successful, also could drive positive rating actions. However, more aggressive cash deployment to shareholders, defense spending uncertainty, and the need to bring down 787 costs make an outlook change unwarranted at this time.

Boeing’s debt ratings are supported by its balanced business portfolio (commercial aerospace/defense), competitive positions in its main business lines, financial flexibility, liquidity position, access to capital markets, high barriers to entry in its key businesses, and large backlog. Debt reduction also supports the ratings, with Boeing paying down nearly $2 billion of debt in 2012, $774 million in 2013, and $755 million in the first three quarters of 2014.

Rating concerns include low margin levels for the rating category; the outlook for U.S. defense spending; the aging of some of Boeing’s defense programs; the size of the company’s pension deficit; some remaining risks with the 787 program; and the susceptibility of the commercial aerospace industry to shocks such as terrorism and disease. The ongoing production ramp-up of commercial airplane deliveries, including potential pressure on the supply chain, is also a concern, although Boeing has effectively managed this risk over the past 18 months.

The Large Commercial Aircraft (LCA) market is in the middle of a strong upturn which will drive higher revenues and cash generation at Boeing Commercial Airplanes (BCA). A large order book, overbooked delivery slots, new airplane model deliveries, delivery acceleration requests, and geographic diversity are elements of this outlook. Fitch believes support to raise production rates persists because of the large backlog and strong orders so far in 2014 (1,011 aircraft net of cancellations). BCA’s backlog continues to grow, reaching 5,552 aircraft worth approximately $430 billion at the end of September. This is the largest backlog in Boeing’s history and represents approximately seven years of production at estimated 2014 production rates, although this coverage varies greatly by program. BCA delivered 648 aircraft in 2013, and Fitch projects Boeing will deliver 725 aircraft in 2014 and 755 in 2015.

The 787 program remains a key driver of Boeing’s growth and competitive position. While many risks have been retired, Fitch still has concerns about the program’s profitability and large inventory level, which reached $38.5 billion (including $25.2 billion of deferred production costs) as of the end of the third quarter.

As of Sept. 30, 2014, Boeing had a consolidated liquidity position of $15.1 billion. This consisted of $10.1 billion in cash and investments, and complete availability under $5 billion of bank facilities, which were recently extended and increased from $4.8 billion. This liquidity position is down approximately $5 billion from year-end 2013 because of increased shareholder cash deployment ($5 billion of share repurchases through September) and timing on cash receipts. Fitch expects free cash flow (cash from operations less capital expenditures and dividends) will be in the $2-3.5 billion dollar range in 2014 and 2015. Fitch expects leverage (Debt/EBITDA) will be approximately 1.0x for 2014.

BCC

Fitch believes that BCC is a core subsidiary of BA, reflecting its role arranging, structuring and providing financing to assist in the sale of BA’s products. The ratings are also supported by the high level of management and operational integration between the two entities, BA’s track record of support for BCC and the fungibility of funding between the two entities.

BA has provided a full and unconditional guarantee for the due and punctual payment and performance of all of BCC’s outstanding publicly-issued debt. Fitch views the guarantee as the strongest form of parent support, which in Fitch’s view, further enhances the rating linkages between the parent and its subsidiary. That said, BCC’s ratings also reflect its consistent operating performance, relatively stable asset quality, and sufficient liquidity profile on a standalone basis.

BCC’s operating performance is consistent with the operating strategy to minimize the use of its balance sheet in support of BA sales. Revenues have trended down in recent years due to a relatively smaller portfolio, but BCC has remained profitable. BCC notes that it has provided less financing recently, given improved airline fundamentals and attractive access to the capital markets.

Asset quality has remained relatively stable, as BCC worked through a number of issues with airline carriers and reduced its financing exposure. Asset impairment charges declined over the last year, and there were no charge-offs over the last two years. Fitch believes that loss reserves, direct BA support and current sector conditions provide sufficient support relative to potential losses on receivables.

Rating Sensitivities

Positive rating actions could be driven by an improvement in Boeing’s credit profile from higher commercial aircraft deliveries, debt reduction, and pension contributions. Several initiatives to boost margins, if successful, also could drive positive rating actions.

There could be a negative rating action if there are material negative developments with the 787 program or other aircraft programs leading to delivery delays, order cancellations, large additional costs, or inventory write-downs. Large acquisitions, although not anticipated, also could negatively affect the ratings, as could share repurchases that consistently exceed free cash flow. Sustained FFO adjusted leverage approaching 2.0x could lead to a negative action.

BCC’s ratings and Rating Outlook are linked to those of its parent. Positive rating actions would be limited by Fitch’s view of BA’s credit profile. Fitch cannot envisage a scenario where the captive would be rated higher than its parent. Conversely, negative rating actions could result from a change in BA’s ratings or from a change in the perceived relationship between BCC and BA, including the early termination of the parent guarantee prior to the repayment of BCC’s outstanding publicly issued debt.

Fitch’s existing ratings for BA and BCC are as follows:

Boeing

—Long-term IDR ‘A’;

—Senior unsecured debt ‘A’;

—Bank facilities ‘A’;

—Short-term IDR ‘F1’;

—Commercial paper programs ‘F1’.

Boeing Capital Corporation:—Long-term IDR ’A;

—Senior unsecured notes ‘A’.

The Rating Outlook is Stable.

Additional information is available at ‘www.fitchratings.com’

Applicable Criteria and Related Research:

—‘2014 Outlook: Global Aerospace and Defense’ (Dec. 12, 2013);

—‘The Boeing Company’ (November 2013);

—‘Corporate Rating Methodology’ (May 2014);

—‘Global Financial Institutions Rating Criteria’ (January 2014);

—‘Finance and Leasing Companies Criteria’ (December 2012);

—‘Rating FI Subsidiaries and Holding Companies’ (August 2012).

Applicable Criteria and Related Research:

2014 Outlook: Global Aerospace and Defense (Commercial Aerospace Flies Higher, Defense in a Stalemate)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726328

The Boeing Company (Boeing Capital Corporation)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721344

Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=908995