The Boeing Company's (NYSE:BA) credit rating may be lowered to junk as a strike stands to cripple production and cash flow.
Aircraft assembly workers walked off the job early Friday morning after rejecting a contract offer presented by Boeing and the International Association of Machinists and Aerospace Workers (IAM) that would have boosted wages by 25% over four years.
The striking machinists produce the 737 Max, Boeing's top-selling airliner, the 777 jet and the 767 cargo plane. The walkout likely will not stop production of Boeing 787 Dreamliners, which are built by nonunion workers in South Carolina, the Associated Press reported.
Jefferies aerospace analyst Sheila Kahyaoglu estimated a 30-day strike could cost Boeing $1.5 billion.
Moody's Investment Ratings on Friday said it will look at how a prolonged strike may impact Boeing's ability to raise cash and make the 737 and 787 models.
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"In our review, we will assess the strike's duration and impact on cash flow and the potential equity capital raising Boeing may undertake to bolster its liquidity," Moody's said.
"We will also assess the extent to which the strike and ongoing challenges in increasing production of the 737 and 787 aircraft models affect the timing of growth in production rates and the pace and scale of improvements in Boeing's operating cash flow."
Moody's said it will also consider the costs for Boeing to complete the fixed price contracts in the defense business, which will continue to be a drain on earnings and operating cash flow.
Moody's rating on Boeing's unsecured debt has stood at Baa3 since April, the lowest rating for the stock to be considered investment grade.
A downgrade to Boeing's credit rating would put it in non-investment grade, or "junk," territory.
Moody's noted that Boeing's annual free cash flow will fall short of $4 billion in debt coming due in 2025 and the $8 billion due in 2026.
"The path to restoring compliance, higher quality and strong cash flow in its commercial aircraft assembly operations remains fraught with execution risk," Moody's said.
Moody's pointed out that the IAM members' 57-day strike in 2008 cost Boeing around $1.5 billion per month, at a time when 737 production was at its then-normal production rate of about 34 per month.
Price Action: Shares of Boeing were down 3.4% to $157.23 at the time of publication Friday.
Exchange-traded funds that hold the stock trended upward on Friday.
- IShares U.S. Aerospace & Defense ETF (BATS:ITA) rose 0.89%.
- Gabelli Commercial Aerospace and Defense ETF (NYSE:GCAD) picked up 1.07%.
- Direxion Daily Aerospace & Defense Bull 3X Shares (NYSE:DFEN) gained 1.72%.
- First Trust Indxx Aerospace & Defense ETF (NYSE:MISL) grew 0.84%.
- Invesco Aerospace & Defense ETF (NYSE:PPA) went up 0.46%.
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