Enterprise Risk Management at Boeing

Details

Themes: -
Period : 2003
Organization : -
Pub Date : 2003
Countries : USA
Industry : -

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Case Code : ERMT-002
Case Length : 11 Pages
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Financial Risks

Leverage & Liquidity
Boeing's consolidated net debt had increased over the past five years. In September 2002, net debt was $11.9 billion, compared to $1.7 billion in December 1997.

Despite strong growth in group EBITDA through to FY01, consolidated group leverage had continued to rise. The sharp decline in EBITDA at Boeing in FY02 as its commercial aircraft segment had suffered, coupled with additional funding needs at BCC had contributed to the increase in leverage. In 2003, Boeing's EBITDA and cash flows were expected to weaken further as commercial jet deliveries waned. However, Boeing would still remain free cash flow positive. This together with slower growth in business volumes would limit the extent of further weakening in the leverage ratios. In terms of liquidity, Boeing had just $1.6 billion of short-term debt in September 2002 with the remainder having an average maturity of close to 10 years.

Against this, it had $1.7 billion of cash and $4.5 billion in unused bank facilities, consisting of a $3 billion 364-day revolver, a $700 million facility expiring in Sept-05 and an $800 million facility due 2004. There were no ratings triggers that would require a cash call over the near term.

Boeing used swaps to adjust the amount of total debt that was subject to variable and fixed interest rates. The company also used forward-starting interest rate swap agreements to fix the cost of funding. This mitigated the changes in fair value of the hedged portion of the firm commitment caused by changes in interest rates. The net change in fair value of the swap and the hedged portion of the firm commitment was reported in earnings.

Boeing used foreign currency forward contracts to manage currency risk associated with certain forecasted transactions, specifically sales and purchase commitments made in foreign currencies.

Commodity derivatives, such as fixed-price purchase commitments, were used by Boeing to hedge against potentially unfavorable price changes for items used in production. In 2001, Boeing used such commitments to purchase electricity and natural gas at fixed prices over the next three years.

Credit Risk
Of the $15,554 million in accounts receivable and customer financing, $7,235 million related to commercial aircraft customers ($366 million of accounts receivable and $6,869 million of customer financing) and $2,597 million related to the US Government. AMR Corporation and UAL Corporation were associated with 23% and 13% of all financial instruments related to customer financing. Financing for aircraft was collateralized by security in the related asset. Historically, Boeing had not experienced a problem in accessing such collateral.

Of the $6,869 million of aircraft customer financing, $6,440 million related to customers, which had less than investment-grade credit in Boeing's opinion. Similarly, of the $7,508 million of irrevocable financing commitments related to aircraft on order including options, $7,113 million related to customers which had less than investment-grade credit in Boeing's opinion. Boeing was a party to financial instruments with off-balance-sheet risk, principally relating to customer financing activities. Financial instruments with off-balance-sheet risk included financing commitments, credit guarantees, and participation in customer financing receivables with third-party investors that involved interest rate terms different from the underlying receivables.

Irrevocable financing commitments related to aircraft on order, (including options), scheduled for delivery through 2010 totaled $7,508 million and $6,230 million as of December 31, 2001 and 2000. Boeing anticipated that not all of these commitments would be utilized and that it would be able to arrange for third-party investors to assume a portion of the remaining commitments, if necessary. The company had additional commitments to arrange for commercial equipment financing totaling $344 million and $288 million as of December 31, 2001 and 2000. Participations in customer financing receivables with third-party investors that involved interest rate terms different from the underlying receivables totaled $51 million and $54 million as of December 31, 2001 and 2000.

Boeing's maximum exposure to credit-related losses associated with credit guarantees, totaled $558 million ($174 million associated with commercial aircraft and collateralized and $373 million associated with the Sea Launch joint venture) as on December 31, 2001 and 2000. Of the $174 million exposure associated with commercial aircraft as of December 31, 2001, the company estimated that the fair value of the underlying collateral, principally commercial aircraft would cover approximately $63 million of the exposure. A substantial portion of the commercial aircraft credit-related guarantees had been extended on behalf of counter parties with less than investment-grade credit.