DBRS Downgrades Bombardier Inc., Maintains Negative Trend

DBRS Limited (DBRS) has today downgraded the Issuer Rating of Bombardier Inc. (Bombardier or the Company) to B and has maintained the Negative trend. When DBRS downgraded Bombardier to B (high), Negative in February 2015, it was noted that additional operational challenges and/or further weakening of profitability could lead to another downgrade, and DBRS expressed concerns regarding the uncertainty of the financial profile. Operating earnings and cash flow for the 12 months to June 2015 were well below DBRS’ expectations. EBIT margins in the Business Aircraft and Commercial Aircraft divisions decreased markedly, at the former due to market softness in key Emerging Markets and at the latter due to higher costs associated with early CSeries production units and an unfavourable mix, both in terms of aircraft deliveries and the breakdown between deliveries and services. The successfully executed financing plan in H1 2015 increased debt to $9 billion as at June 30, 2015, from $7.7 billion as at Dec. 31, 2014. While this caused an expected material weakening of key credit metrics, the recent underperformance in operating results negatively affected the financial profile more than expected. All key credit metrics are now in the “B” range or lower, save interest coverage.

The Negative trend reflects: (1) the continued high cash burn rate, (2) the weaker outlook for operating earnings and cash flow, driven in part by the market weakness in key Emerging Markets, (3) the Company’s inability to secure further firm orders for its new CSeries aircraft and the increased prospects for delays or cancellations of the current firm orders, and (4) the slowing progress toward achieving a broader and more competitive business jet offering suite as a result of the development delays for the technically challenging large class Global 7000/8000 program, and the pause of the Learjet 85 program.

Bombardier’s liquidity position for the next 12 months appears adequate after the execution of the financing plan in Q1 2015, raising gross proceeds from debt and equity of $2.25 billion and $868 million, respectively. Cash on hand at the end of Q2 2015 was $3.1 billion, and including availability under the Company’s credit facilities, total liquidity stood at $4.4 billion. Dividends remain suspended and capital spending guidance is for just under $1.2 billion in H2 2015. Therefore, the Company’s forecast of a year-end cash balance of $3 billion, implying break-even free cash flow (including working capital changes and the cash impact of changes in advances) in H2 2015, seems achievable. The Company has stated that this would be a comfortable cash balance to start a year with $2 billion of capital expenditures (capex) planned. In 2016, DBRS expects capex to be well below 2015’s planned $2 billion, thus DBRS believes the guidance represents an adequate level of cash. An initial public offering of a minority stake in Bombardier Transportation, which is expected in 2016 and could raise over $1 billion, should support liquidity heading into 2017, when capital requirements should be even less onerous. However, DBRS could take an additional negative rating action if cash burn and/or operating performance are worse than expected, the liquidity situation deteriorates more than anticipated, debt increases materially (not anticipated near term), or profitability deteriorates further.

Notes:
All figures are in U.S. 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 (January 2015), 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 credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.