DBRS Comments on Bombardier Inc. Partnership with Province of Québec and Liquidity Position After Q3 2015 Results

DBRS Limited (DBRS) today notes that Bombardier Inc. (Bombardier or the Company; rated B with a Negative trend by DBRS) announced that a memorandum of understanding with the Province of Québec (the Province; rated A (high) with a Stable trend by DBRS) has been agreed upon, whereby the Province would invest USD 1 billion for a 49.5% equity stake in the C Series aircraft program. The limited partnership will be consolidated in the Bombardier results. The Province will also receive warrants, exercisable to acquire up to 200 million Class B subordinated voting shares of Bombardier. The funds are expected to be received by Bombardier in two equal instalments on April 1, 2016, and June 30, 2016. DBRS notes that while this announcement has a positive impact on the liquidity outlook for Bombardier, it has no impact on DBRS’s current ratings of either Bombardier or the Province of Québec.

DBRS notes that the planned investment is not expected to have a material impact on the Province’s finances. The investment is expected to boost the Province’s 2016–17 gross borrowing requirements by USD 1 billion and projected 2016–17 DBRS-adjusted debt levels by approximately 0.5%. In exchange, the Province will receive a 49.5% equity stake in the new joint venture and a commitment that the Bombardier C Series operations will remain in Québec for a period of at least 20 years.

Bombardier’s Q3 2015 results were weak, with revenues declining across all segments, including a 39% year-over-year (YOY) decrease in Commercial Aircraft sales due to lower regional jet deliveries and a 15% decline in sales at Bombardier Transportation (BT), largely due to the negative impact of the stronger U.S. dollar, but also due to lower rolling stock sales in Europe. Business Jet sales were more resilient, although revenues still dropped 5% YOY due to lower deliveries of larger-class aircraft. In addition to the lower revenues, EBIT before special items fell 74% to $75 million due to lower margins in the Business Aircraft and Transportation segments, and a loss in the Commercial division.

As a result, Bombardier reported an operating cash flow loss, which, along with capital expenditures of $502 million, led to a total cash burn for the quarter of $761 million. Although the Company affirmed the guidance it released previously for 2015 (including segment margins, certain segmented revenue projections and aircraft delivery expectations), the projected year-end liquidity balance of $4.0 billion (cash plus credit facilities) is modestly below DBRS’s expectations. While Bombardier’s financial metrics through Q3 2015 have weakened compared to Q2 2015, gross debt remains unchanged at $9 billion and the liquidity outlook is more favourable as a result of the announcement regarding the partnership with the Province, in addition to the expected initial public offering of a minority stake in rail division BT.

However, DBRS notes that the Company continues to face strong headwinds as it attempts to improve its operating performance and financial profile. DBRS could take a 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 falls further.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Industrial Products Industry (June 2015), which can be found on our website under Methodologies.

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

The Bombardier rating 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.

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