TEXT - S&P withdraws Bombardier 'BB' issue-level rating

Tue Nov 20, 2012 10:22am EST

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Overview
     -- We are withdrawing our 'BB' issue-level rating, and '4' recovery 
rating, on Bombardier Inc.'s proposed US$1 billion of unsecured notes. The 
company has decided to not issue these notes.
     -- We are also affirming our 'BB' long-term corporate rating on 
Bombardier.  
     -- While Bombardier's decision to not issue debt at this time will mean a 
somewhat better leverage ratio, with an adjusted debt-to-EBITDA ratio of about 
6.3x compared with 7.0x for 2012, the company will not benefit from US$1 
billion in additional liquidity. 
     -- We continue to view Bombardier's current liquidity position, with a 
US$2.1 billion cash balance, as adequate, but there is less cushion if capital 
expenditures were to increase due to delays in the CSeries programs.
     -- The stable outlook reflects our expectations that the company will 
continue to generate strong cash flows and credit metrics will improve over 
the next two years. 

Rating Action
On Nov. 20, 2012, Standard & Poor's Ratings Services withdrew its 'BB' 
issue-level rating, and '4' recovery rating, on Bombardier Inc.'s proposed 
US$1 billion of unsecured notes. The company has decided to not issue these 
notes.

At the same time, Standard & Poor's affirmed its 'BB' long-term corporate 
rating on Bombardier. The outlook is stable.

While the company's decision to not issue debt at this time will mean a 
somewhat better leverage ratio, with an adjusted debt-to-EBITDA ratio of about 
6.3x compared with 7.0x for 2012, Bombardier will not benefit from US$1 
billion in additional liquidity. We continue to view the company's current 
liquidity position, with a cash balance of US$2.1 billion, as adequate but 
there is less cushion if capital expenditures were to increase due to delays 
in the CSeries programs.
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 Bombardier'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's 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, and expectations of lower 
order intake in 2013 and 2014 than previously forecast, we expect leverage to 
be about 6.3x at the end of 2012 and gradually improve to 5.5x at the end of 
2013 and about 4.0x by the end of 2014. 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% but should improve to about 15% by year-end 2013 and 
to about 20% by the end of 2014. These ratios do not take into account the 
nearly US$2.1 billion of cash on the company's balance sheet used for working 
capital needs.

Liquidity
Standard & Poor's views Bombardier as having adequate liquidity. While sources 
are expected to exceed uses by more than 2x in the next 12-24 months despite 
heavy capex, 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.

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 Bombardier will continue to 
generate strong cash flows and that credit metrics will improve in the next 
two years, although the heavy capex related to the CSeries will mean debt 
levels will remain flat. We also view that the company will have sufficient 
liquidity between cash on hand and positive cash generation from it rail 
segment to fund heavy capex related to the CSeries programs.  

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 and liquidity becomes less than adequate as per our criteria. 
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% 
on a sustained basis.

Related Criteria And Research
     -- Criteria - Corporates - Industrials: Key Credit Factors: Methodology 
And Assumptions On Risks In The Aerospace And Defense Industries, June 24, 2009
     --  2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Bombardier Inc.
Ratings Withdrawn
                                To                  From
US$1 billion sr unsecured debt  NR                  BB
 Recovery rating                NR                  4

Ratings Affirmed/Ratings Unchanged
Corporate credit rating         BB/Stable/--
Senior unsecured                BB
 Recovery rating                4
Preferred Stock
  Canada scale                  P-4
  Global scale                  B+

NR-Not rated.
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