DBRS Comments on Recent Developments at Bombardier Inc.

DBRS today notes that Bombardier Inc. (Bombardier or the Company) has recently released new information including a delay in entry-into-service (EIS) for the C-Series until late 2015, weaker-than-expected full-year 2013 results and a worse-than-expected outlook for full-year 2014. The newly released information is consistent with the risks that were already incorporated when DBRS downgraded the Company to BB (low) in November 2013 following placing the Company’s rating under review in August, 2013. The trend currently remains Stable, also noting that Bombardier’s business risk profile continues to support the current rating. Nonetheless, most of Bombardier’s key credit metrics are below the current rating level and the Company’s financial profile remains a risk. DBRS could take further negative rating action should the Company announce further material program cost increases, further C-Series EIS delays, profitability challenges or incur greater than expected additional indebtedness.

DBRS downgraded the Issuer Rating and Senior Unsecured Debentures of Bombardier to BB (low) on November 7, 2013, primarily based on the deterioration in the financial profile associated with the ongoing cash burn at the Bombardier Aerospace division. Additionally, DBRS’s rating action at that time reflected concerns regarding the timeline for financial profile improvement, which is not expected until sometime in late 2015 due to delays in revenue from the C-Series as well as profitability challenges. These two key challenges were confirmed with the Company’s announcement postponing the EIS into late 2015 and with the release of profitability guidance for 2014.

The release of full-year 2013 results in February 2014 continued to highlight Bombardier’s weak financial profile which is expected to show no improvement until late 2015. Net free cash flow for full-year 2013 was approximately negative $1.4 billion, with the Company issuing $2 billion of debt in January 2013 to cover the funding shortfall. For full-year 2013 adjusted-debt-to-EBITDA was 5.6 times (x), and adjusted cash flow-to-debt was 0.14x, with both metrics unchanged or slightly worse compared to the last-12-month period ended September 30, 2013.

As pointed out above, there continues to be further uncertainty surrounding the timeline for improvement in the financial profile. The delays in revenues from the C-Series program as well as the uncertainty surrounding the level of achievable profitability, with increasing costs of the C-Series program as well as ongoing contract execution issues at Bombardier Transportation division, could possibly lead to further cash burn and debt increases. Consequently, the Company’s financial profile will likely remain burdened over 2014 and 2015, with further debt increases likely. Credit metrics, including debt coverage ratios, as well as leverage, will continue to be constrained by stagnant profitability and cash flow increasing debt levels.

Liquidity is likely to be sufficient to cover negative free cash flow over the next year, noting limited debt maturities over 2014-2015. The Company’s total available liquidity resources totalled approximately $4.8 billion as at December 31, 2013, with cash balances of approximately $3.4 billion and $1.4 billion of credit facility availability. However, the Company’s liquidity will be stressed under softer-than-expected conditions, elevated capital expenditures, potential working capital investments and seasonal quarterly swings in cash flow from operations. Bombardier could possibly have to address its capital needs or to improve liquidity via further debt or equity issuances.

Despite this, the business profile continues to be the primary ratings support and currently positioned above the existing rating level. Although the Company continues to be burdened by the near-mid-term operating issues surrounding aircraft program delays and transportation contract execution issues, the currently assigned BB (low) rating is also supported by the revenue visibility due to its growing backlog. Bombardier’s order backlog for both divisions has grown substantially since 2010. Total aerospace backlog as at December 31, 2013, was $37.3 billion (approximately 3.0x to 4.0x annual revenue for the division) up from $16.7 billion at January 31, 2010. Total transportation backlog as at December 31, 2013, was $32.4 billion (approximately 3.0x to 4.0x annual revenue for the division) from $27 billion at January 31, 2010. The Company should see stable revenue growth as it delivers on the higher backlog in both divisions, and especially on the aircrafts currently in production.

While Bombardier’s business risk profile will likely remain steady for the near-mid-term of 12 months to 18 months, DBRS forecasts for the financial profile to remain below the current rating range, as the substantial negative free cash flow due to high capital expenditures, reduced profitability and delayed revenues have made any improvement in the financial profile unlikely until 2015. Although the trend currently remains Stable, DBRS will monitor ongoing developments and could take negative rating action, should the Company announce material program cost increases, C-Series EIS delays, profitability challenges or incur greater than expected additional indebtedness.

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

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