Boeing’s Finance Unit: Fuel for Scandal?

Lost in the hubbub over ex-CFO Michael Sears's dealings with a former top Air Force purchasing official has been the role he and other officials played at Boeing Capital Corp.

The turbulence surrounding Boeing’s recently fired CFO, Michael Sears, is about to intensify. As it does, expect Sears’s former post as chairman of the Boeing Capital Corp. (BCC) finance arm to get a much closer look.

Government reviews of a proposed $21.5-billion Air Force contract to lease 100 Boeing-built refueling planes suggest that representatives of BCC had a pivotal role in convincing the Air Force to accept a controversial structure built around a special-purpose entity (SPE) that both Boeing and the Air Force would help create.

The plan has been amended to become a deal involving a partial lease and a partial purchase. But the original 100-plane lease arrangement put BCC — a Boeing unit that’s been overshadowed in media reports so far — in the middle of a scandal involving suggestions of improper sharing by the Air Force of proprietary information about a rival tanker bid and charges that Boeing wielded unethical influence in the shaping of the huge contract.

By using an SPE, Boeing could record immediate sales revenues for the planes it sold to the entity, which would then lease them to the Air Force. A Boeing spokeswoman confirms that BCC was involved in helping structure the lease proposal.

Dubbed “the KC-767A Tanker Trust” after the name of the aircraft, the nonprofit SPE would issue bonds to pay for the planes. The bonds would be linked to the Air Force’s credit rating, rather than Boeing’s.

Under the arrangement, the Air Force’s lease payments to the trust would be used to pay the bondholders’ principal and interest. The Air Force’s payments would be recorded as operating-lease payments, spread out over six years for each plane. At the end of the lease term, the Air Force could either buy the planes for an added $31 million each or let the trust keep them. If the trust sold the planes for more than the amount owed on the bonds, any profits would be returned to the U.S. Treasury.

Buttressed by a Congressional Budget Office analysis in August, Sen. John McCain (R-Ariz.), chairman of the Commerce Committee, determined that the Air Force would eventually pay up to $5.6 billion more for the leased planes than it would have for an outright purchase. The CBO also found that because the government (through the Air Force) would both direct the trust’s financing activities and benefit from them, those activities should be recorded in the federal budget as federal outlays as they occur — not as operating lease payments.

Because the trust is essentially an extension of the government, the CBO stated, the deal meant the government would be leasing the planes from itself. The lease deal further failed to meet government criteria that any leased military items must be general purpose in nature and not built to military specifications — a position in the case of the KC-767A that the Air Force has disputed.

Indeed, Air Force officials have approved the lease deal, and a modified version calling for an initial 20-plane lease, followed by a purchase of 80 aircraft, was submitted to President Bush — who signed it, coincidentally, the day Sears was fired. The deal has since been put on hold until the Pentagon conducts a full investigation of the circumstances surrounding the dealings between Boeing and Air Force officials leading up to the lease deal’s approval.

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