Boeing potentially the largest fallen angel, JPM says

 Investing.com -- Boeing (NYSE:BA) could soon “become the largest fallen angel on record,” with $52 billion of index-eligible debt, JPMorgan (NYSE:JPM) strategists said in a note.

The aerospace giant’s credit rating is under pressure after S&P placed it on CreditWatch Negative, while Moody’s and Fitch maintain similar negative outlooks.

For Boeing to officially drop from investment grade (IG) to high yield (HY), at least two of the three agencies would need to downgrade the company. Should this happen, Boeing’s fall would surpass even Ford’s $51 billion downgrade in 2020, making it the largest in history.

JPMorgan analysts note that “this is an idiosyncratic credit situation, should a downgrade occur. No other large fallen angel has ever transitioned at such tight spreads.” Tight spreads and liquid trading conditions in both IG and HY markets could help ease the transition.

On the other hand, the size and structure of Boeing’s debt present headwinds. With $52 billion in debt, Boeing would be the largest HY issuer by far, representing 3.6% of the index—double the size of the next largest issuer.

Moreover, a significant portion of Boeing’s debt is long-term, with 45% maturing in more than 10 years, an uncommon trait for HY companies.

“This is in line with other recent large Fallen Angels like Kraft Heinz (NASDAQ:KHC) on a % basis but much larger on a $ basis,” analysts noted.

“Currently, there is only $26bn of long-end HY debt outstanding across all HY issuers so BA would increase the stock of long-end HY debt nearly two fold. Given what we noted above on capital charges for insurance holders, it is unclear how much long-end debt would in fact transition,” they added.

JPMorgan also highlights the complexity of passive investment strategies in both IG and HY markets. The growing share of passive funds, particularly in IG, may lead to more forced selling if Boeing is downgraded.

Furthermore, about half of HY funds are benchmarked to indices that cap issuer exposure, meaning roughly $22 billion of Boeing’s debt could exceed these limits.

However, JPMorgan points to the current scarcity of high-quality BB-rated bonds, which could make Boeing’s debt attractive to HY investors despite the risks.