DBRS Comments on Bombardier Inc. Sale of Minority Stake in Transportation Unit

DBRS Limited (DBRS) today notes that Bombardier Inc. (Bombardier or the Company; rated B with a Negative trend by DBRS) announced that it had entered into a definitive agreement with the Caisse de dépôt et placement du Québec (CDPQ) to acquire 30% of the Company’s transportation operations for $1.5 billion. This private placement values BT at $5 billion.

DBRS had expected a sale of a minority stake in BT, and this expectation was incorporated into the views expressed in the August 27, 2015, press release and August 31, 2015, rating report. The valuation of $5 billion and 30% stake sold were both at the high end of DRBS’s estimates, but overall consistent with expectations. In light of today’s announcement and the recent sale of a 49.5% stake of its C-Series aircraft program to the Province of Québec (see October 30, 2015 press release), DBRS is comfortable reiterating the view that liquidity for the next 12 months appears adequate. Today’s announcement does not affect the Company’s current ratings.

However, the Company continues to face significant operational challenges. Bombardier has been unable to add additional firm orders for its new C-Series aircraft, the business jet market remains soft, and its efforts to achieve a broader and more competitive business jet offering suite remain delayed until at least H2 2018, when the large-class Global 7000 is expected to enter service. Furthermore, despite efforts to conserve cash, such as the cancellation of the Learjet 85 mid-size business jet program, the suspension of corporate dividends, and lower capital spending as the C-Series development phase ends, cash burn remains significant.

While today’s announcement does not affect the Company’s ratings, 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.

A new holding company (BT Holdco) has been created that will own all of the assets of Bombardier Transportation (BT). CDPQ will acquire convertible voting shares in BT Holdco that will be senior to BT Holdco’s common shares, will have approval rights over key decisions, and will have significant minority board representation. Bombardier will have call rights on CDPQ’s equity interest in BT Holdco after three years, with CDPQ earning a minimum 15% annualized compounded return with upside based on the fair market value of the stake. CDPQ has tag-along rights and Bombardier has drag-along rights in the event of Bombardier selling its equity stake in BT Holdco, with CDPQ being guaranteed a minimum three-year 15% compounded annual return, and the equivalent of a 15% compounded return after three years.

Bombardier will also issue warrants to CDPQ for Class B subordinate voting shares in Bombardier, equivalent to 4.5% (including the implied dilution) of all outstanding Class A voting and Class B shares of Bombardier. The warrants will be exercisable for seven years at a price of $1.66 per Class B share.

Over the first five years of the agreement, CDPQ is entitled to a minimum annualized return of 9.5%, which may decline to no less than 7.5% if BT outperforms its business plan. Should BT underperform its business plan, the minimum return could rise up to 12% per annum. Outperformance by BT would also decrease the implied ownership stake upon conversion, to a minimum of 25%. Underperformance by BT would increase the implied ownership upon conversion to no more than 42.5%.

Bombardier and CDPQ have agreed to a minimum cash threshold at Bombardier of $1.25 billion. BT currently has no significant debt, an unsecured revolving credit facility of €500 million due March 2017, and a letter of credit facility with a committed amount of €3,640 expiring May 2018.

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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