DBRS Confirms Rating of Bombardier Inc.

DBRS has today confirmed the Issuer Rating of Bombardier Inc. (Bombardier or the Company) at BB (low), with a Stable trend. The confirmation incorporates the Company’s challenging financial profile, with weak credit metrics, as well as its acceptable business profile, characterized by its leading position as a global manufacturer of transportation equipment. The Company’s credit metrics have been deteriorating and will remain constrained by the high capital expenditures (capex) at Bombardier’s aerospace division (BA) and weak profitability at Bombardier’s transportation division (BT) for the near term of the next 12 to 14 months. The Company intends to implement some restructuring measures that could improve its profitability starting in the second half of the current fiscal period. However, DBRS notes that the Company’s financial profile is weak for the current rating level. Even though the Company has adequate liquidity to fund its operations, ongoing cash burn in the last few years could put the Company’s liquidity position at 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 cash burn or indebtedness.

Over the course of 2014, the Company’s profitability was weak, as earnings were below expectations due to lower-than-expected margins at the BT division with continued contract execution issues in Europe. For the first six months of 2014, operating margin at the BT division was approximately 5%, significantly below the 6.8% achieved in the same period last year. This development follows relatively stagnant operating margin performance throughout the 2013–2012 period. Consequently, Company-wide margins were also below expectations, and continued to hover around the 5% range for the first six months of 2014.

Bombardier also continued to face challenges at its BA division during the first part of 2014 when an engine-related incident occurred during stationary ground testing involving its C-series flight testing aircraft, effectively highlighting the challenges of the development program, as well as the additional costs that could be incurred. On the whole, the continued development of the C-series and Bombardier’s business aircraft programs have thus far represented a significant capex outlay over the last few years. The vast extent of capex, as well as the stagnant level of earnings and cash flows from operations, have resulted in a substantial negative net free cash flow, which the Company has funded with debt. As anticipated, during the first six months of 2014 the Company issued additional debt to cover the negative free cash flow.

The continued cash drain from the larger-than-expected capex in the aerospace division and weaker-than-expected profitability in the transportation division have in tandem eroded the Company’s credit metrics below the current rating level, with the ensuing negative free cash flow necessitating a further debt increase. The financial profile has further deteriorated as expected during this time as all credit measures for the last 12 months as at June 30, 2014, were weaker relative to those for full-year 2013.

The Company’s liquidity, on the other hand, has remained resilient, totalling approximately $3.9 billion as at June 30, 2014, consisting of cash and cash equivalents of $2.5 billion. During the past year Bombardier has taken a number of steps to ensure adequate liquidity to cover its negative free cash flow, including successful placement of additional debt, extension of revolving credit facilities (and letters of credit) to 2016–2017 and the pre-financing of upcoming maturities until 2016. Based on these steps, and the Company’s demonstrated ability to access the capital markets, DBRS expects that Bombardier will maintain a reasonable level of liquidity over the next 12 months and believes that the Company should not encounter significant problems in raising further additional financing required to cover its negative free cash flow. DBRS expects cash sources to exceed uses by 1.7 times over the next 12 months.

The mid-term revenue outlook is positive for the Company in the next few years due to a strong backlog, although some cancellation risk remains noting the recent cancellation of deliveries by the C-series inaugural operator. Additionally, profitability should improve over the next few years as the Company executes the OneBT restructuring initiative in the transportation division, as well as the reorganization at the BA division. OneBT is an initiative at BT aimed at implementing further cost-reduction measures and labour rationalization. Recently, the Company announced a new aerospace organizational structure which will result in the breakup of the division into three segments. The efforts are expected to result in a reduction of approximately 3,000 employees, noting that the restructuring could also improve the Company’s business risk profile, should it obtain an improvement in its cost position. DBRS will continuously re-assess the Company’s business risk profile as details regarding the restructuring plan, as well as the new divisions, become available.

Despite these positive developments, the Company’s financial profile is weak for the current rating and is projected to remain at under pressure in the near term. The ongoing developments costs of the C-Series program as well as ongoing contract execution issues at Bombardier Transportation division, will likely lead to further cash burn and potential debt increases, with no improvement expected until 2016.

In the short term (12 to 14 months), liquidity should remain adequate; however, the Company’s financial profile is expected to remain weak, with heavy capex continuing to more-than-offset operating cash flows, with further potential debt increases. The trend remains Stable currently, although 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 cash burn or indebtedness.

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.

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

The applicable methodology is Rating Companies in the Industrial Products Industry (July 2014), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.