The pandemic might be temporary, but the debt is permanent
Boeing reported another quarter of negative cash flow Wednesday, to the tune of $3.4 billion, and its sixth consecutive quarterly loss. The plane maker is one of many companies that borrowed from the capital markets heavily last year, even as the pandemic caused its revenue — and ability to pay interest — to shrink.
Why it matters: Piling on new debt helped them survive the immediate crisis, but borrowing their way through the turmoil now puts some at risk of becoming “zombie" companies that can operate but can’t pay off their debts or invest in growth.
The big picture: A slew of high yield companies took on billions more in debt during Covid, in some cases increasing their balances by more than half. Many of them — think cruise operators and airlines — may not see earnings fully rebound any time soon.
By the numbers: Boeing sold $25 billion in bonds last May — one of the largest non-M&A bond deals ever — boosting its total debt balance to $64 billion from $39 billion.
- The bond deal helped it avoid running out of cash as it struggled delayed aircraft sales and its grounded 737 MAX jet, the Wall Street Journal reported. (Regulators began lifting the grounding in November, and Boeing aspires to generate cash flow in 2022.)
Delta, United Airlines and American Airlines all got financial lifelines as each burned through millions per day.
- Air travel has started pick up alongside widespread vaccinations, and though all three airlines reported net losses in their last quarters, they all returned to positive cash generation in March.
- Trade group International Air Transport Association estimates that flight volumes won't return to pre-coronavirus levels until 2023 at the earliest.
Carnival more than doubled its debt load, to $33 billion from $14 billion, as governments issued no-sail orders.
- Norwegian's debt has increased by 36% to $12 billion, while Royal Caribbean's grew by 20%, to $20 billion.
- Some countries have begun to loosen cruising restrictions, and all three operators have announced plans for international cruises this year. However, the Centers for Disease Control has not yet lifted the no-sail order for cruises in US ports, and the companies all reported billions in net losses in their most recent quarters.
Context: The Federal Reserve’s historic asset purchase programs underpinned investor willingness to buy the bonds despite the companies’ minimal earnings.
Yesterday, Fed Chairman Jerome Powell signaled that the central bank “isn’t thinking about thinking about” tapering the bond buying program any time soon, or raising interest rates from their rock bottom levels, wrote Axios’ Dion Rabouin.
The bottom line: Positive economic momentum will help pandemic-stricken companies return to normalized levels of profitability. But they still have to address the drastic increases in their debt loads spawned by unprecedented times, while keeping up with investments in their core businesses.