Keeping an eye on credit ratings

BY JOHN MORROCCO

While anyone who has ever wanted to borrow money has given thought to his or her credit rating, imagine how important it is when you're borrowing billions of dollars.

The borrowers in this case are Boeing and Boeing Capital Corporation, which had combined debt of $12.9 billion as of March 31, 2002. Sounds like a lot, doesn't it? Not for a company the size of Boeing.

Debt is an integral part of the overall funding profile for any corporation. It helps provide the cash for investments that, in turn, generate increased revenues and profits. Examples are funding plant equipment or machinery, product development, or even acquisitions.

About $8 billion of the total is attributable to Boeing Capital Corporation, which uses the funds borrowed to finance equipment leased by customers and to make loans for the purchases made by its customers.

The majority of this debt is made up of corporate bonds or notes— essentially IOUs issued by Boeing and Boeing Capital to the institutions and individuals that loan money by purchasing these bonds. Typically they are long-term bonds with maturity dates of one to twenty years.

Boeing and Boeing Capital also issue short-term debt—called "commercial paper"—that is usually repaid in less than nine months. Commercial paper is used by companies to provide working capital to meet short-term needs, such as accounts receivable and inventories.

Investors look to independent ratings services for an assessment of the quality of a company's bonds. These agencies issue credit ratings based on an evaluation of a company's business and financial strength, performance and outlook. The ratings essentially measure risk, in this case the likelihood that a bond issuer will repay both interest and principal in full and on time to the bondholder.

In addition, a credit rating will influence the amount of interest paid on a new bond issue. Generally, the higher the credit rating of the company issuing the bond, the lower its interest rate will tend to be. That's because the bond buyer is accepting a lower risk. So credit ratings drive the "cost of money" for a company.The Boeing Company currently has credit ratings, both for short- and long-term debt, from three separate agencies—Standard & Poor's, Moody's and Fitch. Boeing Capital has its own separate credit ratings, because it issues its own bonds.

Historically, Boeing has enjoyed high credit ratings, reflecting the agencies' level of confidence in the company's financial strength. But following the terrorist attacks of Sept. 11, Boeing's credit ratings came under review. This was largely due to the negative implications of the downturn in commercial aviation, on top of a global economic slowdown, rather than the company's performance. During this time, a number of major airlines saw their credit ratings tumble.

Moody's downgraded Boeing's long-term debt from A-1 to A-2 just before the end of 2001. It also dropped Boeing Capital's long- and short-term debt ratings by a notch. Standard & Poor's, which rates Boeing slightly higher, followed suit with a similar one-step downgrade in February, lowering Boeing and Boeing Capital's longterm debt ratings from AA- to A+. Both agencies cited uncertainties in the commercial airline market as the reason for their action. They said, however, that difficulties in this segment of Boeing's overall business were partially offset by the prospects for growth in defense and space activities. Both said the company's rating outlook was "stable" and noted Boeing's relatively low debt use and anticipated good overall performance.

Indeed Chairman and CEO Phil Condit told investors recently that, in his mind, the downgrade was "more a reaction to the world and where it was going than it was a reaction to where we are."

"We're in a pretty darn good position," he said. "The balance sheet is superb."

Despite the downgrades, Boeing's credit ratings remain at solid investment-grade levels. In fact, the company's credit ratings are the strongest in the aerospace industry, higher than virtually all of its peers.

In May, Boeing and Boeing Capital received an additional set of ratings from Fitch that essentially parallel those of Standard & Poor's. The agency said Boeing's ratings were supported by "significant cash-generating ability along with a strong balance sheet; a diverse business portfolio... and management's commitment to premier credit ratings."

Chief Financial Officer Mike Sears underscored that commitment recently with investors and analysts: "We know that our credit rating drives our cost of money. So obviously it's important for us that we are paying attention and making sure we have the right strength in our balance sheet."