Become a master of financial engineering instead of aeronautical engineering.
By Wolf richter for WOLF STREET.
The first thing you should know about Boeing's crazy struggle to align "$ 10 billion or more" in new funds through a loan from a bank consortium, in addition to the $ 9.5 billion credit line it obtained in October last year – efforts to somehow overcome its cash flow The nightmare caused by the 737 MAX fiasco is that the company exploited, wasted and incinerated $ 43.4 billion to repurchase its own shares since June 2013, having become a master of financial engineering instead of aircraft engineering.
If Boeing had focused on its business, how to design a new plane instead of designing an old design to save money and time, and if it had not spent $ 43 billion in share repurchase, but would have invested this money in a new design , those two accidents would not have happened, and you would not have to ask for cash now. The following table shows the share repurchases accumulated in billions of dollars since the first quarter of 2009. In the second quarter of 2019, the share repurchases were delayed late (share YCharts repurchase data):
As always with stock repurchase, the idea is to buy high to drive even higher actions. This is what he learned on the first day of Financial Engineering 101. So Boeing stopped buying its shares in the first quarter of 2009 when its shares had plunged into the $ 35 range, at which time they were good business, and He then recommended the repurchase of shares in the second quarter of 2013, when his shares had already risen to the $ 100 range.
The second thing you should know Boeing's madness to borrow another $ 10 billion is that it already has a large amount of debt and other liabilities, and that its total liabilities ($ 136 billion) exceed its total assets ($ 132 billion) by approximately $ 4 1 billion as of September 2019, which means that it has a negative net worth, that share repurchases have destroyed its equity, which is what stock repurchases do on the balance sheet.
It also means that every penny in "cash" and "cash equivalent" listed on the balance sheet is borrowed. And this is about to get worse. By October 2019, Boeing had already obtained a new $ 9.5 billion line of credit, which almost doubled the size of its existing line of credit. Credit lines serve as liquidity support.
And now Boeing is struggling to accumulate "$ 10 billion or more" in new loans.
This huge amount of cash is necessary to finance the cash leakage resulting from the consequences of two 737 MAX accidents, the global grounding of the aircraft now in its eleventh month, the inability to deliver the approximately 400 already built aircraft, the interruption current in production, squeaky suppliers who have now begun layoffs, agreements with their airline customers on land planes, agreements and litigation with the families of the victims of the two accidents, the costs of dealing with regulatory problems global, the collapse of the sales of that plane, the scandal of the Boeing culture revealed by corporate emails that surface, and the costs of redesigning the software of the plane so that the plane is safe to fly, amid You doubt that this can be done.
Prioritizing financial engineering over real engineering can be very expensive.
Now Boeing is approaching an agreement with a group of banks, led by Citibank, for new loans of "$ 10 billion or more" CNBC reported this morning, citing "people familiar with the matter." Banks have already agreed to $ 6 billion of financing so far, and Boeing is talking to other lenders to get more. Commitments expire at the end of this week.
The loans will have a two-year maturity and will have a delayed delay structure that would allow Boeing to access the funds later, Bloomberg reported this morning.
On January 13, Moody & # 39; s finally began to stir in bed, after sleeping for the first 10 months of all this, and Announced which would put Boeing's debt ratings "under review for rebate", for fear of "a more expensive and prolonged recovery for Boeing to restore confidence with its various market components, and a subsequent period of increased operational and financial risk."
And the turmoil among Boeing's biggest customers is growing.
Speaking today at the aviation finance conference of Airline Economics in Dublin, Steven Udvar-Hazy, executive president of the aircraft leasing company Air Lease, which has 150 of these damn planes in order, he said, according to Reuters, that his company "asked Boeing to get rid of that word MAX. I think the word MAX should appear in history books as a bad name for a plane."
"The MAX brand is damaged," he said.
At the same conference, Aengus Kelly, CEO of the aircraft leasing company AerCap, which has 100 Boeing 737 MAX planes in order, urged the owners of these planes not to panic when leasing them at low prices or selling them at a low price , according Reuters:
"Discipline and keeping a cool head is vital because if people panic and rent the plane or sell it at drop rates for a prolonged period of time, it will be more difficult to recover the residual value of that asset." Residual value could be deadly for aircraft lessors. And he urged his colleagues to "be absolutely disciplined when placing the plane."