TEXT - S&P cuts Bombardier rating to 'BB'

Wed Nov 14, 2012 1:02pm EST

Related Topics

Overview
     -- We are lowering our long-term corporate rating on Bombardier Inc. 
 to 'BB' from 'BB+'. 
     -- The downgrade reflects what we view as the company's significantly 
lower-than-expected cash generation in 2012 due to fewer customer advances and 
weaker operating profit given the global economy. This, combined with ongoing 
heavy capex on the C-Series programs (which are facing a six-month delay), 
will mean that Bombardier's leverage ratio will remain high, over 6.0x, until 
2014. 
     -- We are also assigning our 'BB' issue rating, and '4' recovery rating, 
to Bombardier's proposed US$1 billion of unsecured notes. 
     -- The stable outlook reflects our expectations of stable performance 
from the company's rail segment and overall slight improvement in operating 
margins.
Rating Action
On Nov. 14, 2012, Standard & Poor's Ratings Services lowered its long-term 
corporate rating on Bombardier Inc. to 'BB' from 'BB+'. The outlook is stable.

The downgrade reflects what we view as the company's significantly 
lower-than-expected cash generation in 2012 due to fewer customer advances and 
weaker operating profit given the global economy. This, combined with ongoing 
heavy capex on the C-Series programs (which are facing a six-month delay), 
will mean that Bombardier's leverage ratio will remain high, over 6x, until 
2014. 

Standard & Poor's also assigned its 'BB' issue rating, and '4' recovery 
rating, to the company's proposed US$1 billion of unsecured notes. The '4' 
recovery rating reflects average (30%-50%) recovery in a default scenario.
Rationale
The ratings on Bombardier reflect what we view as the company's satisfactory 
business risk profile and aggressive financial risk profile. Our ratings take 
into consideration the company's leading market positions in the 
transportation and business aircraft segments, its good cost efficiency, and 
increasing product range and diversity. These positive factors are partially 
offset, in our opinion, by the financing pressure Bombardier's customers face 
in the aerospace and transportation divisions, significant execution risk in 
the launch of its upcoming CSeries jet, increasing leverage, and weakening 
cushion under the financial covenants.

Bombardier is engaged in the manufacture of transport solutions worldwide. It 
operates in two distinct industries: aerospace and rail transportation. It has 
69 production and engineering sites in 23 countries, and a worldwide network 
of service centers.

The company is a market leader globally in rail, especially in Europe, which 
is considered the largest market for rail at about 60%. Bombardier is also 
considered to have the largest market share in the business jet segment at 
about 37% and the second-largest in the commercial jet segment (about 38%). 
These businesses have high barriers to entry and require substantial 
investments in capital, technical, and project integration skills, as well as 
a reputation building. We believe Bombardier offers a comprehensive range of 
business aircraft of different sizes, and that its transportation division has 
a well-established track record in Europe, with increasing order acquisitions 
in the more rapidly growing Asian markets. This provides credit strength in 
our assessment of the company's competitive position.

We believe that Bombardier's transportation business has provided crucial 
support to the company's cash flows and expect this to continue until there is 
a more sustained meaningful recovery in its aerospace business. We are 
concerned that delays in deliveries, as seen in 2011, or reduced customer 
advances due to the weak global economy could reduce cash flows from the 
transportation division. We expect the unit's book-to-bill ratio to remain 
over 1x this year and the backlog to remain at about three years as European 
countries continue to invest in their rail infrastructure despite the current 
economy. While the transportation division has a large exposure to Europe, it 
has limited (below 10%) exposure to Portugal, Spain, and Italy, and most of 
this is for service contracts. The division does not have any contracts with 
Greece.  

The company's regional jet business has been performing below expectations 
with an EBIT margin of below 6%. For the first nine months ended Sept. 30, 
2012, orders for commercial aircrafts were up slightly from the previous year 
(138 versus 133), while deliveries were about half of those in 2011 (34 versus 
67). While business jet orders have been in line with expectations, customer 
advances have been lower, which is a key source of liquidity to help fund 
heavy capital expenditure related to the CSeries programs. Further 
constraining the business is the development of the CSeries aircraft, expected 
to be delayed by six months mainly due to supplier issues. The company now 
expects the first flight for the programs in mid-2013. Although Bombardier 
expects no significant increase in capex related to recently announced delays 
to the CSeries programs, Standard & Poor's recognizes that additional delays 
could lead to order losses and an increase in capex. The CSeries orders have 
been below our expectations, with 138 firm orders so far. The company is 
maintaining its target of 300 firm orders by the time of launch. However, it 
will have to directly compete against Boeing Co. (A/Stable/A-1) and Airbus 
(not rated) in this category. 

On the business jet front, Bombardier continues to hold a leading position in 
the industry, which was hard hit in the 2008-2009 economic downturn. The 
industry has begun to recover, with increasing order flow and lower 
cancellations, and we believe Bombardier continues to maintain market share. 
However, overall demand for new aircraft will likely remain low due to the 
lingering effects of the global recession and a growing used business jet 
market. It might be several years before demand returns to pre-recession 
levels. 

We consider the company's financial risk profile as aggressive. While we 
believe that management is committed to a moderate financial policy, weak cash 
flow generation and heavy capex have resulted in weakening credit metrics. 
Furthermore, the decrease in the discount rate related to pensions has 
resulted in a significant increase in the company's pension deficit, leading 
Standard & Poor to adjust the debt for pension deficit to US$2.3 billion for 
2011 from US$1.3 billion in the previous year. As a result, our adjusted 
leverage ratio is 6.9x as of Sept. 30, 2012. Even if we were to remove the 
effect of the lowered discount rate, adjusted leverage would be about 6x. 
Given weaker-than-expected performance year-to-date, expectations of lower 
order intake in 2013 and 2014 than previously forecast, and issuance of new 
debt, we expect leverage to be about 7.0x at the end of 2012 and gradually 
improve in the next two years to 4.5x-5.0x. Our forecasts are based on 
following assumptions:

     -- Consolidated revenue to decline by about 7.5% in 2012 and rise by 
about 4.5% in 2013;
     -- EBITDA margins to be 7.6% in 2012 and improve to 8.2% in 2013;
     -- The company issues US$1 billion of notes; and
     -- Free cash flow usage to be about US$500 million in the next two years 
and to become positive in 2014.

Our cash flow protection levels as measured by funds from operations (FFO) to 
total debt are below 15% and likely to remain there for the next couple of 
years. These ratios do not take into account the nearly US$2.1 billion of cash 
on the company's balance sheet as it is used for working capital needs.

Liquidity
We view Bombardier as having adequate liquidity. While sources are expected to 
exceed uses by more than 2x in the next 12-24 months, we expect the headroom 
under the company's leverage covenant to be below 30% in 2012, which does not 
meet the threshold for strong liquidity under our criteria. While we expect 
the cash position to improve in 2012 as the company works through delayed 
deliveries from 2011, we are concerned that further delays in deliveries, as 
seen in 2011, or a decline in customer advances, could further constrain 
liquidity in light of expected large capital expenditure in the next two 
years. The company's cash position has declined by about US$1.2 billion in the 
first nine months of 2012.

Furthermore, the company's issuance of US$1 billion of notes will shore up 
additional liquidity to help fund large capex on the CSeries programs. 

The company's debt maturity profile is favorable with no major debt due until 
2016 other than the US$161 million notes maturing in 2014, which we expect the 
company to refinance as they come due.

Recovery analysis
For the complete recovery analysis, see the recovery report on Bombardier to 
be published on RatingsDirect on the Global Credit Portal following this 
report.

Outlook
The stable outlook reflects our expectations that the company will have 
sufficient liquidity between the proceeds from bond issuance and positive cash 
generation from it rail segment to fund heavy capex related to the CSeries 
programs. While the company will likely generate strong cash flows from 
operations in the next two years, the heavy capex related to the CSeries will 
mean debt levels will remain flat. We do expect leverage to improve but to 
remain above 6x until 2014. 

A further downgrade is possible, if lower customer advances and additional 
delays in the CSeries programs lead to greater-than-expected negative free 
cash generation. This could ultimately lead to delays in any improvement to 
the adjusted leverage ratio from our current expectations in the next 
year-and-a-half. 

Under the current business conditions, we believe an upgrade is unlikely in 
the near term. Nevertheless, when what we view as more normal and stable 
market conditions return and the company successfully launches the CSeries, we 
could consider revising the outlook to positive or raising the rating on 
Bombardier if in turn the company improves its financial measures, with 
adjusted debt to EBITDA falling below 4x or adjusted FFO to debt reaching 20%.

Related Criteria And Research
     -- Methodology and Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Methodology And Assumptions On Risks In The 
Aerospace And Defense Industries, June 24, 2009

Ratings List
Ratings Lowered/Recovery Rating Unchanged
                                        To                 From
Bombardier Inc.
Corporate credit rating                 BB/Stable/--       BB+/Stable/--
Senior unsecured                        BB                 BB+
 Recovery rating                        4                  4

Ratings Assigned
Bombardier Inc.
US$1 billion sr unsecured debt   BB
 Recovery rating                 4

Ratings Affirmed
Bombardier Inc.
 Preferred Stock
  Canada scale                          P-4                
  Global scale                          B+
FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.