DBRS Confirms Bombardier Inc. at B, Maintains Negative Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Bombardier Inc. (Bombardier or the Company) at B with a Negative trend. This action reflects the continued financial stress from development project spending (Global 7000) and ramp-up costs and risks associated with the C Series program at a time of weak demand for business aircraft. Bombardier continues to be a heavy net user of cash. The rating remains underpinned by Bombardier’s majority stake (70%) in Bombardier Transportation (BT), the global leader in rail equipment manufacturing; its very strong market share in medium- and large-sized business jets; and the significant financial and technological barriers to entering the aircraft/rail manufacturing space.

In the 12 months ended June 30, 2016, revenues and earnings fell, reflecting the lower production rate for the Global 5000/6000 business aircraft, a decrease in rolling stock activity in the rail business and the expected margin dilution of early-production-phase units of C Series aircraft. Bombardier continued to utilize substantial amounts of cash, although capital spending has started to decline. A $1.7 billion free cash flow deficit was financed with investments from Caisse de dépôt et placement du Québec and the Province of Québec (rated A (high) with a Stable trend by DBRS).

Offsetting developments have left the Company’s business profile in roughly the same position as last year. While softness in the business jet market persists, the completion of the development phase of the C Series program was an important milestone achieved. However, it is imperative that Bombardier makes progress toward its near- and medium-term goals. This will require (1) steady improvement from BT, (2) further C Series orders and a successful ramp-up, (3) stable performance from other aircraft divisions and (4) Global 7000 development without additional delays/cost overruns.

While C Series ramp-up execution risks are significant, the program provides a potential new growth platform in a large market with favourable long-term prospects. (See the DBRS commentary Bombardier’s C Series: Cleared for Take-Off but Significant Risks Remain also published today.) Development capital is now focused on the Global 7000, which would add an ultra-long-range offering to an already broad business jet offering suite, possibly by year-end 2018. Financial risk is deemed to be of highly speculative credit quality. However, DBRS anticipates that beyond 2016, Bombardier should achieve modest improvement. In the meantime, liquidity remains adequate for at least the next 12 months.

A new senior management team has clearly articulated aggressive goals, including plans to bolster the EBIT margin to 7% to 8% by 2020. Should the rate of cash usage progress at a pace faster than anticipated or should the trajectory of financial recovery be slower than expected, DBRS may consider a downgrade. Steady, demonstrable progress toward strategic goals over the next four to six quarters will likely be required before DBRS considers restoring the trend to Stable.

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 (April 2016), 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.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.