Defense Firms to Vie for Virus Aid With Boeing Weighing Options
Defense Firms to Vie for Virus Aid With Boeing Weighing Options
(Bloomberg) --
U.S. defense contractors and a huge network of their suppliers are expected to seek some of the $17 billion pool of federal money designated for companies vital to national security and contending with coronavirus disruptions.
Problem is, no one knows who will qualify for the funds, what the application process will be, or when Treasury Secretary Steven Mnuchin will distribute the money.
An even bigger unknown is whether Boeing Co., the No. 2 U.S. defense contractor, will tap -- and possibly exhaust -- the national-security fund. The money comes with a condition that could turn the Chicago-based company away from seeking some of the $17 billion pot: It must give the U.S. an equity stake in return for the money.
Whether Boeing applies for some of the fund will determine how much money is left for hundreds of thousands of other defense contractors that may be vying for help amid the virus outbreak.
“The number of companies this will affect is going to be very significant,” said Hawk Carlisle, president of the National Defense Industrial Association, a trade group of defense contractors whose members include Lockheed Martin Corp. and Boeing. “I think demand will be outrageous, and it’s not going to be enough,” he said.
Boeing’s Options
Boeing is keeping its options open as it explores raising $10 billion to $20 billion to ride out the pandemic, according to a person familiar with the matter. The company is discussing financing terms and conditions with Treasury officials, whether it seeks help through the national security fund or a broader, $454 billion pool that’s also part of the $2 trillion stimulus package.
Another option is financing offered by the Federal Reserve to help investment-grade companies access the capital markets, said the person, who asked not to be identified as the discussions are confidential. Boeing could even ask for aid under a combination of programs, the person said. The company has retained investment banks Lazard Ltd. and Evercore Co. to help it sort through the options.
President Donald Trump on Friday predicted Boeing would seek federal help, without specifying what form that might take. “Boeing has not asked for aid yet, but I think they probably will,” Trump said during a White House news conference. “We can’t let anything happen to Boeing.”
The $2 trillion rescue package Congress adopted in late March includes loans and loan guarantees specifically for companies “critical to maintaining national security.” Yet more than two weeks after Trump signed the measure, procurement experts say they know little about how it will be disbursed. Many also doubt the $17 billion will be enough.
Mnuchin Decides
Mnuchin confirmed earlier this month that he will decide who gets what, unlike the rest of the stimulus package. The Federal Reserve is the primary vehicle for keeping credit flowing from lenders to large and medium-sized businesses that need help to maintain payrolls and pay rent. The Small Business Administration is overseeing lending to firms with fewer than 500 employees.
But Mnuchin has direct authority over the $17 billion for national-security firms and another $29 billion for airlines and cargo carriers.
The Treasury Department, which said on April 6 that it will issue guidance on national-security financing “in the near future,” declined to comment. Treasury has hired Wall Street advisory firm Perella Weinberg Partners to work on the national-security loans. A spokesperson there declined to comment.
Defense Base
The defense supply chain counts about 300,000 companies, from the biggest weapons-system contractors to the more numerous, lower-tier suppliers of everything from software to uniforms. It’s those smaller companies, which lack the access to capital and the large balance sheets that major corporations have, that could be especially at risk. Many also depend on evaporating commercial sales to supplement their defense work.
Of 10,509 locations tracked or monitored by the Pentagon’s Defense Contract Management Agency, 135 had closed at some point as of April 8. Of those, 49 had reopened after an average of about 10 days.
The numbers, however, don’t reflect contractors that have cut back operations -- or the outsized effect of Boeing’s shutdowns. It has indefinitely halted assembly of the KC-46 refueling tanker and the P-8A Poseidon maritime patrol aircraft at its facilities in the state of Washington, the initial center of the pandemic in the U.S.
When national-security funding was included in the stimulus package, some viewed it as earmarked for Boeing. The money, however, comes with strings: Companies must maintain 90% of their workforce and can’t buy back their own stock or pay dividends to shareholders.
Supply Chain
With Boeing also halting commercial jet assembly, the stoppage cascades through its supply chain, which includes General Electric Co., Spirit AeroSystems Holdings Inc., and Safran SA. Smaller manufacturers, which often serve the automotive industry as well, are most at risk, according to an analysis by Bloomberg Intelligence.
“Lacking the financial wherewithal to survive an extended downturn, a number of them will fail unless they get support from larger manufacturers or governments,” the report said.
With aviation suppliers hit hard by coronavirus outbreaks, knock-on effects could roil the defense supply chain, said Andrew Hunter, the director of the Defense-Industrial Initiatives Group at the Center for Strategic and International Studies in Washington.
“Supply chains are like a web. When you have a disturbance somewhere it can kind of ripple into other areas,” Hunter said. “If a company goes out of business, everyone can be out of luck pretty quickly.”
Production Slowdowns
The National Defense Industrial Association said Pentagon contractors are experiencing production slowdowns due to stay-at-home orders and sick workers. As a result, payments are delayed, though the Pentagon last month increased periodic payments to help contractors.
Samantha Clark and Zach Mears, who are tracking the rollout of the national-security money for aerospace and defense companies at law firm Covington & Burling LLP, say a broad array of companies could potentially benefit.
“It’s relatively open to those businesses that can make the justification that they fit into a component of the defense-industrial base,” said Mears.
Clark and Mears said they have heard from suppliers that been adversely affected and may be interested in applying. But they are frozen until they receive Treasury’s guidance. The list potentially could go beyond even big contractors and their suppliers to include telecoms and utility companies, Clark said.
Pentagon officials say they worry that disruptions could force suppliers to turn to foreign investors to survive. The Defense Department didn’t respond to a request seeking comment.
Losing Technology
“It’s critically important that we understand that during this crisis the DIB is vulnerable to adversarial capital,” Ellen Lord, the Pentagon’s top acquisition official, told reporters on March 25, referring to the defense industrial base. “So we need to ensure companies can stay in business without losing their technology.”
Small defense suppliers could try to get loans through the $349 billion pool the SBA oversees, but that program has been overwhelmed by demand and beset by glitches.
Others may not yet know how much they need because the effects of the virus are still playing out, said Robert Durbin, chief operating officer of the Aerospace Industries Association. “It’s a very hard decision,” he said, “whether or not to make a move” and seek a loan.
©2020 Bloomberg L.P.
