Moody's: Prolonged 787 Review Is Credit Negative for Boeing

CHICAGO ( TheStreet) -- Moody's said the prolonged investigation of the 787 battery problems is credit negative for Boeing ( BA), but strong liquidity continues to support a strong credit rating.

"The longer the plane is grounded, the greater the risk of the company's 2013 cash flow meaningfully declining," Moody's said in a report issued Monday. "Boeing is unable to collect what amounts to several hundred million dollars of cash remittances from its airline customers every month that it cannot deliver planes." Additionally, Boeing spends an estimated $750 million to $1 billion a month to produce five 787s a month that are not being delivered, the rating agency said.

"We're commenting on the developments as they occur real time," said Moody's analyst Russell Solomon, in an interview. "We thought this (prolonged investigation) was negative. The longer things go on, the worse it will get for the company."

Moody's has an A2 stable rating on Boeing. "We don't think the rating is in jeopardy for the time being," Solomon said. "One of the best things Boeing has going is is a pretty strong liquidity profile. This is a perfect example of why a strong liquidity profile is important, particularly for companies that operate in the aerospace industry: There are bound to be hiccups along the way. You have cyclical issues as well as issues related to production programs."

Key factors in Boeing's strong liquidity include continuing deliveries of successful commercial aircraft led by the 737 as well as defense programs that account for about half of revenue. Defense programs continue for years, "have a high degree of predictability" and continually contribute profit margins in the high single digits or low double digits, Solomon said.

In a briefing on Feb. 7, Deborah Hersman, chairwoman of the National Transportation Safety Board, said it may take up to 30 days for the agency to prepare a report on the lithium-ion battery problems that have grounded the 787 since Jan. 16. She said that Boeing and the Federal Aviation Administration underestimated the potential for smoke events in the batteries.

"We've had two events resulting in smoke less than two weeks apart on two different aircraft," she said. "The fleet has accumulated less than 100,000 flight hours. They did not expect to see a smoke event (more than once) every 10 million hours.

"The FAA and Boeing have to evaluate the assumptions they were making during the certification process," Hersman said. "I am confident that is what they are doing now."

It could take "months and months" for the FAA to complete its 787 review and allow the airplane to fly again, former NTSB member John Goglia said in an interview Monday. "We just don't know enough," Goglia said. "We know that the battery overheated; it reaches a critical point and then it gets to 'thermal runaway.' That could be caused by a short circuit in the battery or by external factors. That's the problem, trying to identify the cause."

In his note, Solomon wrote: "This process will take more time, something that does not work in Boeing's favor. The longer it takes to identify the factors behind the battery failure and the systems designed to protect against fire, the longer it will take to implement satisfactory safeguards to prevent a recurrence."

Solomon called six months "an inflection point."

He would be troubled, he said, "once you get past six months of not having some resolution and not knowing it won't cause billions of dollars to fix." At that point, a perception of credit risk could lead to a negative outlook, rather than just a perception that a particular event is credit negative.

-- Written by Ted Reed in Charlotte, N.C.

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