Jet Funding May Add to Boeing’s $100 Million-a-Month Max Pain

Article

Boeing Co.’s 737 Max fiasco could make the aircraft maker liable for planes bundled into debt, adding to total costs the company may incur in the aftermath of the Ethiopian Airlines crash.

Customers of the company could demand Boeing compensate them for the ongoing financing of their Max aircraft if the jets aren’t deemed airworthy, according to Deutsche Bank. That could be an issue after regulators worldwide grounded the plane last week. Several airlines have bundled their planes into debt instruments known as enhanced equipment trust certificates, common in the industry.

“We believe all airlines affected by grounding will look to Boeing for compensation and assess the cost to start around $100 million per month and rise by $12 million per month thereafter,” said Bloomberg Intelligence Analyst George Ferguson. “We see the EETCs as part of this compensation as the airlines that have them outstanding will be making claims regardless of whether the aircraft are included in EETCs.”

There are 37 737 Max aircraft included in five outstanding EETC deals, Deutsche Bank said. These transactions are backed by a wide array of planes, and total $3.8 billion, according to data compiled by Bloomberg.

Any costs linked to EETCs for Boeing would be on top of other financial hits associated with the plane’s being grounded. The company’s cash flow could be hurt by $3.7 billion this year, according to Credit Suisse Group AG, or about a quarter of the cash flow forecast by the bank.

Investors, however, may not need to worry. “The structure of the EETC provides for both credit protections as well as protections against par call due to the aircraft being out of service for an extended period of time,” Deutsche Bank analyst Douglas Runte wrote in the report. The payments on the EETC are contractually required to continue.

There are no 737 Max aircraft in any outstanding aircraft asset-backed securities transactions, another type of securitized debt used in aircraft finance.

“We do not expect the Max will have a material effect on aircraft lessors rated by Fitch,” Fitch Ratings said in a statement last week. The Boeing 737 Max however could remain a concern throughout the aviation credit sector for much of 2019, according to Fitch.