Boeing would be the biggest US “fallen angel” ever if it were scrapped

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

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

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

A Boeing spokesman declined to comment for this story.

“Idiosyncratic Credit Situation”

JPMorgan does not have an opinion on the likelihood of Boeing moving to junk or what such a transition would mean for its credit fundamentals, strategists Eric Beinstein and Nathaniel Rosenbaum wrote in a note Thursday.

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

“Typically, downgrades from high-grade to high-yield are clustered around recessions or economic crisis,” the analysts wrote. “This is an idiosyncratic credit situation, should a downgrade occur. No other great fallen angel has ever made the transition at such close rates.”

The corporate bond market has swelled in recent years, so even though Boeing has more debt than any other borrower in history, it occupies a smaller part of the investment-grade universe. The company makes up just 0.7% of Bloomberg’s US Corporate Investment Bond Index. When Ford Motor Co. and General Motors Co. were downgraded in 2005, they held 8.3 percent and 3 percent of the high-grade market, respectively, according to JPMorgan.

But there are also reasons why the transition could lead to big price moves for the company’s debt. Boeing’s $52 billion in debt is high by junk issuer standards. And it has a relatively high proportion of longer-term debt, while most high-yield investors focus on shorter- and medium-term securities to help manage credit risk.

High-quality, high-yield funds that pool bonds based on factors such as credit quality and maturity to pay regular returns to investors could also be affected. More passive fund investors have flocked to the high-end market over the years, which would mean more “forced sellers” if Boeing is downgraded, according to JPMorgan.

“I would expect a fair amount of index-related selling as debt changes hands between the investment-grade and high-yield markets,” said Scott Kimball, chief investment officer at Loop Capital Asset Management. “It wouldn’t surprise me if things got worse because high-yield investors aren’t as beholden to benchmarks in general.”

Because high-yield active managers won’t be “forced buyers,” they’ll have a greater degree of pricing power, according to Kimball.

“The costs of transferring liquidity are real,” he said. “High yield buyers, being less focused on the index, are the price setters. It’s the opposite of upgrades where passive money is more prevalent.”