DBRS Confirms Bombardier at BB, Trend Stable

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 have also been confirmed, at Pfd-4 with a Stable trend. The Company’s financial and business risk profiles remain acceptable for the current ratings, which are not expected to change in the near term. BBD is a leading global manufacturer of transportation equipment, including a broad range of business and commercial aircraft.

BBD’s operating results weakened over the past year, but were reasonable when considering the extent of the downturn in aircraft industry conditions. BBD’s aerospace business (BA), which accounts for close to 50% of sales, experienced a sharp decline in earnings and cash flow in F2010 and H1 F2011. Lower business aircraft orders and deliveries, partly from a spike in cancellations, were mainly responsible and driven by weaker economic conditions and reduced customer access to financing. The Company’s commercial aircraft business was relatively stable during the year, albeit from a low base. While BA operating margins materially declined in F2010 on a year-over-year basis, they were only modestly below the five-year average levels.

Earnings for the Company’s transportation business (BT) in F2010 continued the trend of steady growth since F2006, and have helped to mitigate the pressure facing BA. Despite economic softness and uncertainty in Europe (BT’s largest market), operating results were stable through H1 F2011 and order activity has been favourable. Growth in Asia-Pacific and North American sales has largely offset reduced activity in Europe over the past 12 months to July 31, 2010. Margins continued to trend positively to solid levels, which is partly attributable to improved contract execution/efficiency gains.

Over the near term, BBD’s sales and earnings are expected to decline, but margins should remain relatively stable. BA results are likely to remain under pressure but aerospace industry conditions appear to have stabilized; order intake has improved (albeit at a modest rate) and should be higher in H2 F2011. A favourable mix of sales from larger and more expensive business aircraft, as well as improved pricing, should help offset the impact of further delivery declines on operating earnings. BT operating results are expected to remain solid, although are likely to be modestly lower than in F2010. Sales should decline due to softer demand related to economic conditions/uncertainty in Europe but the order backlog remains strong. Combined with recent contract wins, this should translate into earnings growth in F2012.

BBD’s balance sheet leverage remains high for a cyclical company and currently limits upside to the ratings. Large capex requirements, particularly related to the Company’s CSeries program (scheduled for delivery in 2013), limited its ability to generate free cash flow (before working capital) in F2010. Debt and cash were used to finance significant working capital requirements in H1 F2011, but working capital outflows should largely reverse in H2 2011 (partly from advances related to an improved order intake). As such, DBRS does not expect BBD’s balance sheet to witness significant change over the near term, with debt likely remaining relatively constant or slightly higher. The Company’s core credit metrics should modestly weaken, with adjusted debt-to-EBITDA in the high 3.0 times range, but remain acceptable for the ratings. The recent refinancing of long-term debt has helped extend the Company’s maturity schedule and reduced near-term financing requirements, which adds financial flexibility, and liquidity is not a concern.

Note:
All figures are in U.S. dollars unless otherwise noted.

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

This rating did not include issuer participation and is based solely on publicly available information.