DBRS Confirms Bombardier Ratings at BB and Pfd-4, Trends 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 confirmation reflects our expectation that the Company’s financial measures, while acceptable for the current rating, are unlikely to materially improve in the next two to three years because of high capex requirements and continued demand uncertainty in the Company’s aerospace division (BA, accounting for 45% of total EBIDTA in H1 F2012). BBD is a leading global manufacturer of transportation equipment, including a broad range of business and commercial aircraft.

DBRS believes that the business risk profile of BBD’s transportation division (BT, contributing 55% of total EBITDA in H1 F2012) is adequate and stronger than that of its BA division, which contributes the remaining 45% of EBITDA. BT is supported by its market-leading position, particularly in rolling stock, although this is partly offset by its single-digit EBIT margin. Despite its cost focus and steadily improving profitability and execution track record in the past six years, the low operating margin and complexity in contract execution could leave little room for problems or delays. BA’s business risk profile is weak, in view of volatile demand conditions and significant execution risks associated with the ongoing aircraft development programs. Although these product developments could enhance BA’s long-term market positions in both the business and commercial aircraft segments, they would likely result in negative free cash flow for BA in the next two to three years. BBD has reported that these programs have to-date progressed according to schedule.

BBD’s overall financial performance in F2011 (ended January 31, 2011) weakened further from F2010 levels, with 9% declines in both revenue and EBITDA, largely reflecting continued slow aircraft deliveries and slow freight locomotive sales. More recently, however, DBRS has observed signs of improving market conditions over the past 12 to 18 months, supporting 13% and 8% year-over-year increases in revenue and EBITDA, respectively, in H1 F2012. In addition, the Company has witnessed strong order intake over this period, increasing backlog to $57 billion at July 31, 2011, up almost 30% from the January 31, 2010 level. This improved backlog level should provide some support to BBD’s future operating cash flow generation.

The deterioration was also partly the result of an increase in debt by $500 million to finance BBD’s capital spending and lower EBITDA, and was maintained at similar levels for the first six months of F2012. Gross adjusted debt-to-EBITDA of 3.4 times (x) and cash flow-to-total debt of 24% are at the weaker end of acceptable ranges for the rating, although this is partly mitigated by BBD’s strong liquidity position.

Going forward, DBRS conservatively expects revenue to grow by 5% to 7% and for the overall EBITDA margin to be maintained between 8.5% and 9.5%, reflecting the support from the Company’s currently strong backlog position. We also expect capex to remain high at $1.4 billion in F2012, $1.2 billion in F2013 and $1.0 billion per year thereafter to support ongoing product developments and capacity increases, with BBD expected to maintain a cash balance of $3.0 billion. With these assumptions, we project that BBD’s financial measures will stay at similar levels, with adjusted debt-to-EBITDA between 3.0x and 3.4x and cash flow-to-adjusted debt between 20% and 22% over the next few years. DBRS expects more meaningful improvement to occur only after F2014. We are mindful that demand volatility (especially in BA) and possible execution problems in the Company’s aircraft development program could potentially worsen financial measures in the near term from our projections and/or delay their improvements beyond F2014.

DBRS would consider raising BBD’s rating if the Company successfully completes developments and builds its order books for the new aircraft programs, continues its improvement in execution and operating margins in BT, and begins to strengthen its financial risk profile through improved free cash flow and debt reduction. Conversely, any problems or delays in new aircraft programs that could affect BBD’s market standing as an aircraft manufacturer or materially increase development costs could result in negative rating action.

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

The applicable methodologies are Rating Companies in the Industrial Products Industry and DBRS Rating Methodology for Leveraged Finance, which can be found on our website under Methodologies.

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