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Nov 13 (The following statement was released by the rating agency)
Fitch Ratings has affirmed the Issuer Default Rating (IDR) and long-term ratings for Bombardier Inc. (BBD) at 'BB'. The Rating Outlook has been revised to Negative from Stable. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
The revision of the Rating Outlook to Negative reflects concerns that BBD's credit metrics may be weak longer than expected. Debt/EBITDA at Sept. 30, 2013 was 6.3x and has remained above 6x since January 2013 when BBD issued $2 billion of new debt that was used to support liquidity during a period of significant capital spending at Bombardier Aerospace (BA). Fitch anticipated leverage would remain elevated through much of 2013 but would begin to decline near the end of the year as BA got beyond its peak program spending and as the regional aircraft and lighter business jet markets eventually began to recover. However, these markets remain difficult. In addition, there were development delays on the CSeries prior to first flight, and Bombardier Transportation (BT) has experienced execution challenges. These developments could extend the negative cash cycle and prevent leverage from improving as soon as originally expected by Fitch.
First flight for the CSeries was achieved in September 2013, nine months after the original target date. Entry into service is now anticipated not sooner than late 2014, and additional delays are possible. The CSeries is the largest and most important development program at BA, and the company's ability to recoup its investment and establish a competitive position in the 100-149 seat category will require effective execution, satisfactory performance of new technologies included in the aircraft, and sufficient orders. There are currently 177 firm orders for the CSeries compared to BBD's target of 300 orders by the time the CSeries enters service. The level of new orders prior to entry into service will be important for the success of the aircraft and BBD's ability to develop a viable market for the aircraft. Other development programs include the Learjet 85 scheduled for first flight by the end of 2013 and the Global 7000 and 8000 aircraft scheduled for entry into service in 2016 and 2017, respectively.
Free cash flow was negative $1.9 billion through the first nine months of 2013, including adjustments for changes in off-balance sheet factoring facilities. Cash flow typically is strong in the last quarter which would reduce the negative FCF for the full year. The biggest driver of negative FCF is high capital spending for development programs at BA, primarily for the CSeries, but BA is also investing in several new or upgraded business jet programs involving large, medium and light aircraft. The negative impact of capital spending is exacerbated by low customer advances at BA.
Although BA's backlog is at a solid level, many of the orders are for CSeries aircraft or fleet business jets which will be delivered over several years. Fitch anticipates FCF will be negative again in 2014 but at an improved, smaller level than 2013 as capital spending declines. However, an improvement in FCF will depend on BBD's ability to avoid significant further delays in its CSeries and other aircraft development programs and to improve overall margins.
FCF also includes the impact of pension contributions which BBD estimated could amount to $458 million in 2013. At the end of 2012, the net pension obligation was $2.5 billion, including $736 million of unfunded plans. Funded plans were 80% funded. BBD estimates the net obligation at Sept. 30, 2013 declined by $663 million due to a higher discount rate and positive asset returns.
Other rating concerns include margin pressure. At BA, weak demand in the smaller end of the business jet market is making pricing difficult, but demand is better for large business jets. Margins will also be pressured in the medium term by the CSeries due to higher costs associated with initial production. Orders for regional jets and turboprops have been low as the market shifts toward larger aircraft. For business jets, BA has received less than half the number of orders received for the first nine months of 2012, but the figures don't include a large order that would be booked upon completion of the pending sale of BBD's FlexJet business for approximately $185 million.
BT has targeted 8% EBIT margins by 2014 but has experienced continuing execution challenges on certain contracts which contributed to a segment margin of 6.5% during the first nine months of 2013. These challenges are being gradually addressed but remain a risk. BT operates in more stable markets than BA, partly reflecting significant revenue from government customers. Government spending on rail transportation is under some pressure, but BT's orders and backlog have been steady.
Rating concerns are mitigated by BBD's diversification and strong market positions in the aerospace and transportation businesses and BA's portfolio of commercial aircraft and large business jets. The company has continued to refresh its aircraft portfolio which should position it to remain competitive.
BBD's liquidity at Sept. 30, 2013 included approximately $2.6 billion of cash and availability under a $750 million bank revolver that matures in 2016. In addition, BT has a EUR500 million revolver that matures in 2015. Both facilities are unused. BA and BT also have LC facilities. The bank facilities contain various leverage and liquidity requirements for both BA and BT which remained in compliance at Sept. 30, 2013. Minimum required liquidity at the end of each quarter is $500 million at BA and EUR600 million at BT. BBD does not disclose required levels for other covenants.
In addition to the two committed facilities, BBD uses other facilities including a performance security guarantee (PSG) facility that is renewed annually as well as bilateral agreements and bilateral facilities with insurance companies. BA uses committed sale and leaseback facilities ($242 million outstanding at Sept. 30, 2013) to help finance its trade-in inventory of used business aircraft. In addition, BT uses off-balance-sheet, non-recourse factoring facilities in Europe under which $1.2 billion was outstanding.
Liquidity is offset by current debt maturities that totaled $216 million at Sept. 30, 2013. Upon completion of the planned debt refinancing, the nearest scheduled maturities of long term debt will include $750 million of 4.25% notes due in 2016 and approximately $650 million of 7.5% notes due in 2018. In addition to long term debt, BBD had $784 million of other current financial liabilities including refundable government advances, sale and leaseback obligations, lease subsidies and other items. BBD also has contingent liabilities related to aircraft sales and financing and to foreign currency risk. BA's contingent liabilities have been generally stable or slightly lower, except trade-in commitments for used aircraft. These commitments have increased due to the growth in orders for larger business jets.
A positive rating action is unlikely while FCF is negative and leverage is high. However, longer term developments that may, individually or collectively, lead to higher ratings include:
--Orders and deliveries improve at BA;
--The CSeries program is executed successfully;
--BT improves project execution and builds stronger margins;
--FCF improves materially as development spending for aerospace programs begins to wind down.
Future developments that may, individually or collectively, lead to a negative rating action include:
--FCF does not improve significantly in 2014;
--The CSeries encounters further material delays or increased costs, or future orders are insufficient to support profitable production levels;
--Commercial and business jet markets experience an extended period of weak demand;
--Liquidity is insufficient to carry BBD through the current development cycle at BA.
Fitch has affirmed BBD's ratings as follows:
--IDR at 'BB';
--Senior unsecured revolving credit facility at 'BB';
--Senior unsecured debt at 'BB';
--Preferred stock at 'B+'.
The Rating Outlook is Negative.
The ratings affect approximately $7.3 billion of debt at Sept. 30, 2013. The amount includes sale and leaseback obligations and is adjusted for $347 million of preferred stock which Fitch gives 50% equity interest. The debt amount excludes adjustments for interest swaps reported in long-term debt as the adjustments are expected to be reversed over time.
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