The Spirit AeroSystems bond experienced volatile yield shifts due to Boeing's potential acquisition and quality control issues, reflecting market reactions to strategic moves and safety concerns.
The Spirit AeroSystems 9.75% Nov 2030 USD bond (US85205TAR14) has undergone noteworthy shifts in its yield. Initially, on March 1, the yield dropped by 149 basis points to 6.4%. However, over the subsequent three weeks, the yield reversed course, witnessing a notable increase of 77 basis points to 7.2%, consequently leading to a Z-spread of 223 basis points.
The decrease in yield observed earlier in March was attributed to Boeing's confirmation of exploring a takeover of Spirit AeroSystems. Boeing, which already stands as Spirit's largest customer, accounting for 64% of the supplier's revenue last year, is considering a move that could reshape their relationship. This prospective acquisition, if materialized, could have offered Boeing strategic advantages in streamlining its supply chain, especially in the wake of recent challenges. With Boeing potentially able to finance the acquisition through stock, it was seen as a move to bolster Boeing's operations while sparing its balance sheet from further strain, considering the aftermath of the 737 Max grounding and the pandemic.
Conversely, the subsequent increase in yield was spurred by revelations of significant quality control issues plaguing both Boeing and Spirit AeroSystems. A six-week audit by U.S. air safety regulators, initiated after an alarming incident involving a door panel detachment during an Alaska Airlines flight, uncovered numerous lapses in quality control across Boeing and Spirit AeroSystems facilities. The New York Times' review of an internal FAA slide presentation shed light on the extent of the issues found during the audit. Notably, out of 89 product audits conducted at Boeing, 33 resulted in failures, while Spirit AeroSystems faced failure in seven out of 13 audits. These failures were primarily attributed to deviations from approved manufacturing processes, inadequate documentation, and lapses in quality control.
Instances such as mechanics at Spirit using a hotel key card to check a door seal, or applying liquid Dawn soap as a lubricant in the fit-up process, underscored the gravity of the situation. Boeing's response, including the pledge to develop a comprehensive action plan for quality control improvements within 90 days, reflects the seriousness of the findings.
Moreover, amidst ongoing investigations by the FAA, National Transportation Safety Board, and the Justice Department, concerns surrounding Boeing's safety culture have resurfaced. The findings of a panel report, revealing a "disconnect" between senior management and employees regarding safety, further compound these concerns.
On November 8, 2023, S&P Global Ratings maintained Spirit AeroSystems' issuer credit rating at 'B'. Meanwhile, Moody's assigned a B2 corporate family rating to the company, citing factors such as weak credit metrics, a varied history of execution, and imminent hurdles associated with the heightened production levels of crucial aerospace projects. Moody's also anticipates limited cash generation through 2025. The debt-to-EBITDA ratio persists at an elevated level, exceeding 10x.
The Yield Map for Spirit AeroSystems bonds denominated in USD as of March 19, 2024:
Spirit AeroSystems Holdings, Inc. designs and manufactures aero structures for commercial and defense aircraft. Its operations encompass three segments: Commercial, Defense and Space, and Aftermarket. The Commercial segment produces fuselage sections, floor beams, nacelles, and stabilizers. The Defense and Space segment focuses on fixed wing aircraft, missiles, hypersonic systems, and rotorcraft. The Aftermarket segment offers spares, repair, and overhaul services. Founded in 2005, the company is headquartered in Wichita, Kansas. Spirit AeroSystems Holdings, Inc. has a market capitalization of $3.78 billion as of March 18, 2024.