Boeing Would Be Biggest-Ever US ‘Fallen Angel’ If Cut to Junk

(Bloomberg) -- If cut to junk status, Boeing Co. will be the biggest US corporate borrower to ever be stripped of its investment-grade ratings, flooding the high-yield bond market with a record volume of new bonds to absorb.

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On Tuesday, S&P Global Ratings said it’s considering downgrading the planemaker to junk as strikes at its manufacturing sites persist, hurting production. Last month, Moody’s Ratings said it’s considering a similar move. Fitch Ratings has highlighted the growing risks but not yet announced a review.

Downgrades to junk from two of Boeing’s three major credit graders would leave much of its $52 billion of outstanding long-term debt ineligible for inclusion in investment-grade indexes. If that happens, Boeing would become the biggest ever fallen angel — industry parlance for a company that’s lost its investment-grade ratings — by index-eligible debt, according to JPMorgan Chase & Co. analysts.

“Boeing has worn out its welcome in the investment-grade index,” said Bill Zox, a portfolio manager at Brandywine Global Investment Management. “But the high-yield index would be honored to welcome Boeing and its many coupon step-ups.”

A spokesperson for Boeing declined to comment for this story.

‘Idiosyncratic Credit Situation’

JPMorgan isn’t taking a view on the likelihood of Boeing transitioning to junk or what such a transition would mean for its credit fundamentals, strategists led by Eric Beinstein and Nathaniel Rosenbaum wrote in a Thursday note.

There could be a relatively seamless transition, the strategists wrote. Credit spreads are tight trading conditions are relatively liquid trading in both the high-grade and high-yield markets, the strategists wrote. Much of of Boeing’s debt has a coupon step-up feature — where the interest rate increases by 0.25 percentage point for each step below investment-grade that each ratings firm downgrades by, which could make it more palatable to some investors, including insurers.

“Usually downgrades from high-grade to high-yield are clustered together around economic downturns or crisis,” the analysts wrote. “This is an idiosyncratic credit situation, should a downgrade occur. No other large fallen angel has ever transitioned at such tight spreads.”