DBRS Downgrades Bombardier Inc.’s Ratings to BB (low), Stable Trend

DBRS has today downgraded the Issuer Rating and Senior Unsecured Debentures of Bombardier Inc. (BBD or the Company) to BB (low) and the Preferred Shares were downgraded to Pfd-4 (low). The trend on the Issuer Rating is Stable and DBRS has removed all ratings from Under Review with Negative Implications. Additionally, DBRS has discontinued the Company’s Senior Unsecured Debentures and Preferred Shares ratings effective immediately. The rating actions mainly reflect the Company’s weak financial profile largely due to the ongoing cash burn at the Bombardier Aerospace (BA) division, with any material improvement pushed out for a longer time frame than originally expected.

Today’s downgrade follows DBRS’s rating action on August 6, 2013, which placed the ratings Under Review with Negative Implications, reflecting DBRS’s view that the credit metrics have migrated outside of the previously assigned rating range due to large negative free cash flows associated with the C-series program, as well as elevated debt levels and weaker earnings. BBD released its quarterly results at the end of October 2013, further positioning the financial profile in the newly assigned BB (low) rating range. For the last 12 months (LTM) ended September 30, 2013, adjusted debt-to-EBITDA was 5.6 times (x) and adjusted cash flow-to-debt was 0.16x, with both metrics unchanged or slightly worse compared to the LTM period ended June 30, 2013.

While DBRS acknowledges that BBD has completed some C-series test flights in the last quarter, beginning with the maiden flight on September 16, 2013, the high ongoing capital expenditure requirements of the BA division, and the string of C-series flight testing delays of approximately nine months, have elevated the program’s costs. Consequently, the Company had large negative net free cash flows of approximately $1,958 million and $1,287 million for YTD Q3 2013 and full-year 2012, respectively. The Company issued $2 billion in debt in January 2013 to cover the funding shortfall, effectively leveraging up the balance sheet and weakening all credit metrics.

Some recent developments have also highlighted concerns surrounding the time frame for improvement in the financial profile. The Company’s recent quarterly announcement highlighted soft aerospace market conditions at BA, as well as new contract execution issues at the Bombardier Transportation (BT) division. From a profitability perspective, EBIT margins have been disappointing, and remained relatively stagnant throughout the 2013 and 2012 periods, further derailing the Company’s plan of achieving a 6% margin at BA and a 8% margin at BT for full-year 2014. This has further added to the uncertainty surrounding the level of achievable profitability and the level of cash from operations that BBD will be able to attain in the near to medium term to cover capital expenditures, also raising the possibility of further debt increases.

The outlook for improvement in the financial profile is further burdened by the uncertainty of the amounts and timing of revenues from the C-series program. The length of the flight testing time frame is presently at a highly aggressive 12 months after first test flight. The potential extension of the 12-month flight-test window will make entry into service challenging before the end of 2014 (noting it was originally scheduled for the end of 2013). While the long-term outcomes of the program are yet to be determined, the recent challenges could also prove costly in terms of missed revenue opportunities from customers who are observing the C-series program from the sidelines. DBRS notes that firm orders for the C-series aircraft are at 177, far below the 300 unit target for the program. The Company has received no significant new firm orders since the Ilyushin Finance Company’s firm order for 32 CS300 aircrafts in June 2013.

In the near mid-term, the high capital expenditures, volatile aerospace market, delayed C-series deliveries and general profitability issues have further postponed the anticipated recovery in BBD’s financial profile until sometime beginning in 2015. DBRS believes that elevated capital outlays are likely to exceed the weaker cash flow from operations and free cash flow is therefore projected to be negative. Liquidity is likely to be sufficient to cover negative free cash flow over the next year, noting that total available liquidity resources totalled approximately $4.0 billion as at September 30, 2013. DBRS notes that it would not be unexpected for BBD to address its capital needs or to improve liquidity via further debt issuances, especially during the seasonally demanding quarters.

With continued elevated debt levels at September 30, 2013, and with limited ability of the BT division to cover the negative free cash flows of the BA division, especially in light of weaker profitability, the financial metrics have now fallen in line with a BB (low) rating.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Industrial Products Industry (June 2013), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

This is an unsolicited rating. This rating was not initiated at the request of the issuer or rated entity and did not include participation by the issuer or any related third party.