The Non-Bailout: How the Fed Saved Boeing Without Paying a Dime
(Bloomberg) -- Less than two months ago Boeing Co. went to Washington, hat in hand, asking for a $60 billion bailout for itself and its suppliers. The company, which had spent heavily on stock buybacks and was still reeling from the 737 Max disaster, was an unlikely candidate for government support.
Yet by urging the Federal Reserve to take unprecedented steps to bolster credit markets, the Trump administration ended up helping the plane maker more than any government handout could.
The Fed’s decision to use its near limitless balance sheet to purchase corporate bonds improved liquidity so much that it was a game changer for the company, according to people with knowledge of the matter who asked not to be identified because they weren’t authorized to speak publicly.
Ultimately, it allowed Boeing to raise $25 billion from private investors and withdraw its request for a government rescue, avoiding the restrictions that would have certainly been imposed.
Boeing’s decision underscores the extent the Fed’s policies rebuilt confidence in credit markets even though the central bank has yet to spend a single dollar on its corporate debt program.
“Many companies that would’ve had to come to the Fed have now been able to finance themselves privately since we announced the initial term sheet on these facilities,” Fed Chairman Jerome Powell said during a press conference on April 29, before Boeing’s bond sale. “There’s a tremendous amount of financing going on, and that’s a good thing.”
Just weeks earlier, Boeing’s hunt for rescue financing had gotten off to an inauspicious start. Nikki Haley, President Donald Trump’s former ambassador to the United Nations, resigned from the company’s board in protest. Other critics were quick to argue the government could better spend its funds.
Company executives were undeterred.
They considered two main avenues to raise the billions of dollars of cash they would need to weather the crushing loss of business stemming from the coronavirus pandemic.
The company would turn to the capital markets to start building a cash stockpile, and then either tap financing available from the Fed or obtain a loan from the Treasury Department through the CARES Act, the people said.
The main turning point came as Congress and the Trump administration set more than $2 trillion of stimulus into place in late March. That funding calmed markets by enabling the Fed to inject even more liquidity into the economy through several lending facilities that the Treasury backstopped.
Also crucial was a deal to shore up U.S. airlines, key Boeing customers. Governments around the globe have committed about $100 billion to keeping airlines afloat, providing assurance that there will be buyers for Boeing airplanes when the outbreak abates.
A further rally in credit markets since then convinced the company and its bankers that they could move quickly after the release of quarterly earnings on April 29.
Boeing entered Thursday hoping to raise between $10 billion and $15 billion by selling bonds with maturities stretching as far out as 40 years, the people said. As demand for the offering peaked at over $70 billion, company officials realized they didn’t need to look any further for funds, and set the final size of the deal at $25 billion, turning it into the largest U.S. corporate bond sale of the year and the sixth largest on record.
Most of the buyers were asset managers and insurance companies that typically dominate the market for high-grade bonds, though some hedge funds and other speculative-grade investors were lured by the relatively high yields offered, one of the people said.
For the first time, the company included provisions that will increase the interest rate paid if the credit ratings on the notes are lowered to junk. Boeing is currently rated BBB- by S&P Global Ratings -- the lowest investment-grade ranking.
A representative from Boeing referred Bloomberg to comments from Chief Financial Officer Greg Smith to employees this week in which he called the bond sale “a testament to the confidence the market has in our business, our people, and our future.” The company declined to comment further.
But executives and Treasury Secretary Steven Mnuchin were deeply worried about the long-term damage to the company and airlines when the markets started to seize up in mid-March.
Mnuchin and his staff have been in almost constant contact over the past month with Boeing officials, particularly Smith, as they collectively sought to find a way through the crisis, one of the people familiar said. The talks are ongoing and Boeing is now concerned about shoring up critical suppliers who are under severe financial distress.
A Treasury Department spokesman did not immediately reply to a request for comment.
The bond market signaled its confidence in the long-term prospects of the aviation industry on Thursday. But while Boeing now has a nearly $50 billion war chest to survive the next few years, the company will still need to take painful measures. That includes paring 16,000 jobs to adjust to a smaller commercial airplane market, one of the people said.
Boeing hasn’t closed the door to seeking federal aid in the future, especially given the risk the pandemic may again cripple travel and economies later this year. In fact the company artfully worded its statement to leave that option open, saying it had raised the funds it needs “at this time.”
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