DBRS Confirms Bombardier Inc. at BB, Stable Trend

DBRS has today confirmed the Issuer Rating and the Senior Unsecured Debentures rating of Bombardier Inc. (BBD or the Company) at BB with a Stable trend. BBD’s Preferred Shares are confirmed at Pfd-4 with a Stable trend. The Company’s business and financial risk profile was relatively steady over the past year despite increasingly challenging business aircraft industry conditions. BBD is a leading global aircraft and rail transportation equipment producer, with a well-diversified revenue base evenly split between its aerospace (BA) and comparatively stable transportation (BT) divisions, and favourable liquidity. However, the Company is exposed to highly-cyclical end markets that have historically contributed to financial volatility, and its balance sheet leverage is high.

BBD’s earnings and cash flow are expected to decline over the near term, but remain acceptable for its BB rating. The Company’s operating performance peaked in F2009 at strong levels, but the sharp deterioration in business aircraft industry demand that commenced in late-calendar 2008, and relatively soft demand for its commercial aircrafts are likely to pressure near-term financial results. BBD’s business aircraft division has been the key factor responsible for the growth in earnings over the past several years. However, the well-documented slowing in macro-economic conditions and distressed credit market conditions mainly contributed to materially lower business aircraft deliveries in H1 2010, lower selling prices and a high level of order cancellations/deferrals that reduced BA’s backlog. Weaker than expected results from BA remain a primary risk to near-term earnings and cash flow, and a material recovery in demand is not expected before calendar 2011.

DBRS notes that despite the challenges faced by the Company’s BA division, any downside to the ratings is unlikely over the near term. There are signs that business aircraft industry demand has stabilized (albeit, at low levels), which should limit significant deterioration in BA’s operating results. BBD continues to invest in new business and commercial aircraft products in advance of an eventual economic rebound and should be well positioned when demand eventually improves. While risks associated with the production of the CSeries aircraft remain (i.e., competition, cost overruns, demand), it is expected to be important to BBD’s medium- to long-term future and development is expected to continue as planned. In addition, BT, which is the leading manufacturer of passenger rail equipment, has steadily improved margins from weak levels in F2005, and the trend is likely to continue. Efficiency improvements, modestly growing end-market demand (with expected benefits from recent government stimulus programs) and BT’s strong backlog are key earnings drivers that should help mitigate weaker BA results.

BBD’s leverage remains high for a manufacturing company. The Company generated a large net free cash flow deficit over the past 12 months to June 30, 2009, following positive free cash flow over the past several years. Large working capital uses were mainly responsible, and restricted the Company’s ability to reduce debt. Adjusted debt-to-capital remains relatively aggressive in the high-50% range (excluding BBD’s underfunded pension position) at July 31, 2009. While key coverage ratios over the 12 months to July 31, 2009 were favourable, they declined from peak F2009 levels and are expected to continue to modestly weaken over the near term. Furthermore, the underfunded position of BBD’s pension plan has increased since end-F2009 (to $1.8 billion at July 31, 2009) and is expected to continue to require large cash infusions. However, debt repayment obligations are minimal until late-calendar 2012, which reduces refinancing risk. Furthermore, liquidity is currently not an issue, given the Company’s large cash position and ample available credit that includes a recently closed $500 million two-year revolving credit facility. In the event that business aircraft market conditions show signs of a recovery, coverage ratios remain relatively in line with current levels and adjusted debt-to-capital improves (closer to the low-50% range) over the near term, DBRS would consider a positive rating action.

Notes:
All figures are in Canadian dollars unless otherwise noted.
This rating is based on public information.

The applicable methodology is Rating the Industrial Products Industry, which can be found on our website under Methodologies.

This is a Corporate rating.