Boeing has told its primary 737 supplier Spirit AeroSystems to produce only 72 shipsets this year, including 35 already delivered, pushing the Wichita aerostructures giant toward violation of debt covenants.
In a June 22 regulatory filing, Spirit said Boeing told it on June 19 to reduce total shipset production to 72—below the 125 shipset target set just a few weeks earlier and far off the 216 envisioned around February. The reasons are COVID-19’s effects on the commercial aerospace sector and the growing inventory of undelivered MAX narrowbodies.
“The B737 MAX grounding, coupled with the COVID-19 pandemic, is a challenging, dynamic and evolving situation for Spirit,” the aerostructures leader said.
“Given the substantial production plan reduction, Spirit could breach the financial covenants under its credit agreement in the fourth quarter of 2020 without an amendment or waiver,” the company continued in the U.S. Securities and Exchange Commission filing. “Spirit is in communication with its lenders regarding this matter and intends to work with them expeditiously to obtain appropriate relief from its covenants.”
Spirit did not detail what covenant or covenants were at risk. Spirit managers were able to renegotiate the company’s financial covenants in the first quarter to gain relief from previous requirements and—under their prior understanding with Boeing—were confident they could meet requirements and still close on pending acquisitions of Asco and Bombardier’s aerostructure assets, especially since the company could access a then-untapped $800 million revolving credit facility.
According to Jefferies analysts, Spirit now has three applicable covenants through 2022 regarding first-lien-leverage ratio, interest coverage, and minimum liquidity. The first two covenants set a series of rolling parameters regarding the mix of debt and pretax earnings or interest coverage. The liquidity covenant requires Spirit to have $1 billion in liquidity at the end of each month through 2021.
A separate covenant regarding the ratio of total leverage was suspended through the first quarter of 2022.
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