Bombardier restructuring exposes liquidity, debt risks -analysts

TORONTO, July 30 Wed Jul 30, 2014 4:07pm EDT

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TORONTO, July 30 (Reuters) - Bombardier Inc's unexpected aerospace restructuring announcement last week casts an uncomfortable light on the division's ongoing struggles, with credit rating firms uncertain about its longer term prospects.

The restructuring, which was announced July 23, eight days before the release of second-quarter results on Thursday, is the latest bad news for the beleaguered unit, bruised in recent years by multiple delays in its cash-draining CSeries program and by shrinking market share for its existing aircraft portfolio.

In the reorganization, Bombarier will cut 1,800 jobs and split aerospace into three units.

Analysts say the action is a prudent step that will streamline bloated operations, offer more transparency on profit and margins, and potentially save the company more than $100 million.

But ratings agencies still see risk as the company continues to burn through a substantial amount of cash to pursue the CSeries.

"There is now more of a risk than before - even higher costs, which could lead to additional debt, additional cash burn, additional liquidity issues," said DBRS Assistant Vice President Viktor Vorobiev, who in November was the first to downgrade the Montreal-based aircraft and train maker.

"There's a greater chance of uncertainty for sure."

Bombardier's shares, which lag far behind those of its peers as well as the Toronto Stock Exchange's S&P/TSX composite index, have slumped more than 20 percent since the beginning this year, and ended trading on Wednesday at C$3.67, up 7 Canadian cents.

"The CSeries is testing patiences right now ... Before it enters into service, the market will be skeptical about the contributions," said Konark Gupta, an analyst with Macquarie Securities.

The ambitious CSeries program, which Bombardier hopes will dominate the 100-to 150- seat market, is already 18 to 24 months behind schedule.

Spending on the all-new aircraft, which competes with the small jetliners made by Boeing Co and Airbus, has soared above $4 billion.

Meanwhile, some analysts have also noted that while Bombardier's market share in regional jets and turbo props has improved somewhat this year, it has nonetheless shrunk in recent years.

The rising costs and setbacks to the CSeries will continue to put stress on cash flow, said Evan Mann, an analyst with Gimme Credit, which does independent research on corporate bonds.

"At some point, they're probably going to have to borrow a little more debt to get this product launched and just to get it to profitability may take longer than expected. I'm not sure all of that is baked into the current ratings," said Mann. "There could be a ratings downgrade before all of this is over."

Credit rating agencies DBRS, Standard & Poor's and Moody's have all downgraded Bombardier sometime in the last nine months.

DBRS' Vorobiev, whose November rating incorporated many of the negative news this year, said the spotlight on Thursday will be all on the commercial aerospace division.

"(The restructuring) just shows you how off some of the previous expectations were ... We are now getting a better insight as to exactly how wrong they were," he said. (Reporting by Solarina Ho; Editing by Steve Orlofsky)

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