Press Release

DBRS Downgrades Bombardier Inc., Changes Trend to Negative

Transportation
February 13, 2015

DBRS Limited (DBRS) has today downgraded the Issuer Rating of Bombardier Inc. (Bombardier or the Company) to B (high) and the Trend has been changed to Negative. DBRS’s downgrade incorporates the Company’s progressively weaker financial profile due to debt and liquidity burdens, as well as the erosion of its business profile. The Company’s substantial negative net free cash flow and sizeable financing needs to support its aircraft developments programs have led to increasing indebtedness and weakening of all credit metrics in 2014. Substantial cost pressures have led to the erosion of margins at the aerospace and transportation businesses due to competitive and operational reasons. DBRS could take further negative rating action should the Company announce additional operating challenges, encounter difficulties in executing its ambitious financing, incur material indebtedness or see additional deterioration in profitability.

The downgrade follows the Company’s announcement on February 12, 2015, of weaker-than-expected results for full-year 2014 as well as weaker-than-expected guidance for 2015. The results were well below expectations and reflected ongoing challenges in the development of the C-series aircraft program as well as continued contract execution issues under certain transportation contracts. Net free cash-flow was approximately negative $1.3 billion, as cash flow from operations declined to approximately $614 million, down from $1 billion in 2013, and were more-than-offset by capital expenditures of approximately $1.9 billion. Bombardier raised an additional $1.4 billion in debt to cover the shortfall, further contributing to the worsening of its credit metrics, which still lie below the present rating level.

The Company’s announced additional leadership and strategic changes, including the suspension of dividends for both classes of shares, as well as potential divestitures to reduce debt. Other strategic changes included the appointment of a new CEO as well as the discontinuance of its Learjet 85 business aircraft program (announced earlier). The Company proposes to address the forecasted negative net cash flow and liquidity needs in 2015 using an ambitious financing plan which would include the issuance of $1.5 billion dollars of debt as well as the issuance of $600 million dollars of equity.

The financial profile will remain under substantial pressure in the near term. There is some uncertainty in regards to the proposed issuance of debentures as this plan remains subject to market conditions and a shareholder vote, and would only temporarily address negative net free cash flow, noting that the Company faces a maturing USD 750 million of long-term debt obligations in January, 2016. Additionally, while financing plan, if executed successfully, should provide the minimum liquidity needs of the manufacturer over 2015, additional negative-net-free-cash flow, further indebtedness and uncertainty could continue to place the financial profile under pressure.

DBRS also notes that continuous headwinds at both divisions have impacted the Company’s business risk profile, primarily as a result of deterioration in its operating cost and competitive positions. The Company has continuously posted declining profitability for both divisions due to operational reasons, leading to weaker cash flow from operations. Profitability of Bombardier Aerospace continued to come under pressure during its development of the substantial C-series aircraft, while profitability of Bombardier Transportation division has been declining due to execution issues under some contracts. Competitive landscape is an additional area of concern, as intense competition in both the aerospace and transportation segments will continue to erode pricing ability of the Company. Additionally, strategic changes via divestiture of certain business units could pose additional profitability challenges, noting that inherent industry volatility remains a concern, as seen with the recent write-down of Learjet 85 due to lack of demand.

DBRS’s rating action reflects the Company’s rapidly weakening financial and business risk profiles at its aerospace and transportation businesses. The Negative Trend reflects uncertainty surrounding the financial and business profiles of the Company, noting that both are subject to deterioration and potential rating action in the near-mid-term.

Notes:
All figures are in US 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 (January 2015), which can be found on our website under Methodologies.

Ratings

Bombardier Inc.
  • Date Issued:Feb 13, 2015
  • Rating Action:Downgraded, Trend Change
  • Ratings:B (high)
  • Trend:Neg
  • Rating Recovery:
  • Issued:CA
  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

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