Boeing announced it will draw down its revolver to shore up liquidity. If you don’t know what that jargon means, a revolver is like a large credit card for a company to maintain liquidity, or spare cash on the side.
Most of the time, investment grade companies like Boeing don’t draw down their revolver. They keep it as back up for their 2008 / financial crises scenario. On the other hand, some companies like distributors need to use this capacity to fund inventory and accounts receivable during the year.
So Boeing clearly has had issues this year. The 737 Max disaster has clearly increased company costs and cancellations are piling up. Sprinkle in the COVID-19 scenario, which will no doubt in my mind result in a decline in air traffic this year, and the value chain for Boeing starts to face a wrinkle.
Like I said, Boeing is an investment grade company, so lenders were very willing to give the company a $13.8BN revolver when things were going well. They probably never thought Boeing would draw down this revolver and they’d collect a small fee. Well, Boeing drew $7.5BN on it last month and has now apparently maxed it out.
This is problematic and its no wonder why the stock fell 18% today.
Typically, companies fully draw on their revolvers right before they file for bankruptcy. Companies draw on the revolver because they are facing a liquidity crunch or they do this to to shore up cash before a bankruptcy filing (paves the way for better terms). Other than that, companies do this because they fear credit might be cut off from them soon, so they prep for the day today.
I think its probably this latter case. Boeing will face a crunch this year, but longer term the business hopefully will turn around. Its possible the government even steps in given Boeing is a national security interest. Time will tell.
March 12th Update: Several other companies have drawn down on their revolver. Wynn Resorts, Hilton Hotels.
I find it interesting because companies could be saying, “look, we have liquidity. We’ll make it through.” Instead, investors view it as a sign of real trouble. It reminds me of 2008 when banks refused a bailout because it would be a negative sign – so the fed made them all take them.
By the way, has all this happened before where it resulted in bankruptcy? Yes, literally all the time. Here are a few examples: