-- 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
-- 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.
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
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.
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
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
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
-- 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
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.
For the complete recovery analysis, see the recovery report on Bombardier to
be published on RatingsDirect on the Global Credit Portal following this
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
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
Canada scale P-4
Global scale B+