January 10, 2013 / 2:40 PM / 5 years ago

TEXT - Fitch affirms Bombardier Inc BB ratings

Jan 10 - Fitch Ratings has affirmed the Issuer Default Rating (IDR) and
long-term ratings for Bombardier Inc. (BBD) at 'BB', including the 
'BB' rating previously assigned to BBD's proposed issuance of senior unsecured 
notes which are being offered under Rule 144A. BBD increased the amount of the 
proposed notes to approximately $2 billion from $1 billion. The Rating Outlook 
is Stable. A full rating list is provided at the end of this release.

The new debt will include $750 million of 4.25% three-year notes due 2016 and 
$1.25 billion of 6.125% 10-year notes due 2023. Proceeds will be used for 
general corporate purposes and will support BBD's liquidity during a period of 
high development spending on new aircraft programs including the CSeries. Fitch 
expects the increase in the amount of the new debt will be used to support 
higher cash balances, and believes BBD's cash requirements for capital 
expenditures and other uses have not increased since the ratings were downgraded
one notch in November 2012. 

Fitch estimates pro forma debt/EBITDA, including the new debt, would be 
approximately 6.0 times (x) at Sept. 30, 2012 compared to 4.4x as reported and 
3.3x at the end of 2011. The increase in leverage since the end of 2011 also 
reflects $500 million of new debt issued in the first quarter of 2012 and weaker
earnings during the year. Credit metrics may not improve significantly until the
regional aircraft and business jet markets recover and BA gets beyond its peak 
program expenditures. 

BBD's ratings incorporate the company's operating performance and negative free 
cash flow (FCF) that have been weaker than anticipated due to a slow recovery in
Bombardier Aerospace's (BA) regional aircraft and light business jet markets and
execution challenges at Bombardier Transportation (BT). The biggest driver of 
negative FCF is high capital spending for development programs at BA, which will
continue through 2013 before starting to decline. Fitch anticipates consolidated
FCF could potentially be negative into 2013 as capital spending at BA more than 
offsets FCF at BT. FCF at BT could return to a positive level on an annual basis
in 2013. 

Large capital expenditures are centered on the CSeries, but Fitch does not 
consider the negative impact on FCF at this point in the development cycle to be
unusual. In the fourth quarter of 2012, BBD announced a six-month delay to the 
scheduled first flight of the CS100 which now is scheduled to occur by the end 
of June 2013, with entry into service one year later. Entry into service by the 
end of 2014 for the CS300 is unaffected. The change does not increase project 
costs, but BBD may incur some penalties, and the delay slightly extends the 
negative cash cycle. 

At BA, negative FCF includes the impact of a low level of customer advances. 
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. 
Capital expenditures at BA totaled $1.3 billion in calendar 2011 and could be 
near $2 billion in 2012 and 2013. BA cut regional jet (RJ) production in early 
2012 due to low industry demand. 

Demand for regional aircraft reflects a lack of confidence at major airlines 
about supporting regional air service, concerns about turmoil in Europe, high 
fuel prices, and airline industry capacity. However, orders increased during 
2012 for commercial aircraft as well as business jets. In 2012, BA delivered 50 
commercial aircraft, down from 78 aircraft in fiscal 2011 which included 11 
months. Net orders improved to 138 aircraft in 2012 from 54 in the previous 
year. Demand for large business jets, where BA has its largest presence, is 
stronger than the light jet market but remains well below peak levels. In 2012, 
business jet deliveries were up slightly at 179 units compared to 163 units in 
the 11-month period of fiscal 2011. BA received net orders for 343 business jets
in 2012 compared to 191 jets in fiscal 2011. 

At BT, increasing complexity on many projects has contributed to delays in 
project completion, slower collections, higher inventory, lower margins and 
negative FCF. Cash flow has begun to improve and should be positive in the 
fourth quarter of 2012. These challenges are being gradually addressed but 
remain a risk. BT announced it would recognize a restructuring charge of up to 
$150 million in the fourth quarter of 2012 directed toward cutting costs through
layoffs and a plant closure. A large portion of the charge represents cash costs
that are expected to occur over 12-18 months. Government spending on rail 
transportation is under some pressure, but BT's order and backlog remain at 
solid levels. 

BT operates in more stable markets than BA. While not currently anticipated, 
BT's profile could weaken if funding becomes more difficult for government 
customers, or if rail equipment providers such as BT are required to participate
in risk-sharing agreements.

Rating concerns include the slow recovery in demand for regional aircraft, 
execution risks at BT, contingent liabilities related to aircraft sales and 
financing, foreign currency risk, and large pension liabilities. 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. Pension contributions represent a 
material use of cash. BBD contributed $373 million to its plans in 2011, not 
including defined contribution plans, and expected to contribute $394 million in
2012. Net pension obligations totaled $2.8 billion at the end of 2011, including
$569 million of unfunded plans. 

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, which the company has continued to 
refresh and should position it to remain competitive when the market recovers. 

BA's largest and most important development program is the Cseries, which 
targets the 100-149 seat segment. BA's ability to recoup its investment and 
establish a competitive position in the segment will require effective 
execution, performance of new technologies, and sufficient orders. There are 
currently 148 firm orders for the CSeries; this is well below BBD's target of 
300 orders and 30 customers by the time the CSeries enters service. The level of
new orders during the next 12-18 months 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 and Global 7000 and 8000 aircraft 
scheduled for entry into service in 2013 and 2016-2017, respectively.

BBD's liquidity at Sept. 30, 2012 included approximately $2.1 billion of cash 
and availability under a three-year $750 million bank revolver that matures in 
2015. In addition, BT has a EUR500 million revolver that also matures in 2015. 
Both facilities have been unused. BA and BT also have LC facilities. 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 ($215 million outstanding at Sept. 
30, 2012) 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 $1,049 million was outstanding.

The bank facilities contain various leverage and liquidity requirements for both
BA and BT which remained in compliance at Sept. 30, 2012. 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 November 2012,
BBD amended the $1,350 million facility, including the $750 million revolver and
a $600 million LC facility, to provide greater near-term flexibility under the 
leverage covenant. The amendment mitigates potential concerns about covenant 
compliance if BBD's results or liquidity weaken further. 

Liquidity is offset by current debt maturities that totaled $46 million at Sept.
30, 2012. Annual maturities are limited to less than $200 million until November
2016 when EUR785 million of 7.25% notes come due. In addition to debt 
maturities, BBD had $520 million of other current financial liabilities 
including refundable government advances, sale and leaseback obligations, lease 
subsidies and other items. 


Positive: A positive rating action is unlikely until FCF stabilizes, but future 
developments that may, individually or collectively, lead to higher ratings 

--Orders and deliveries improve at BA;

--The CSeries program is executed successfully;

--BT resolves its operating challenges as expected;

--FCF improves materially as development spending for aerospace programs begins 
to wind down. 

Negative: Future developments that may, individually or collectively, lead to a 
negative rating action include:

--The CSeries encounters material delays or increased costs;

--Commercial and business jet markets experience an extended period of weak 

--FCF fails to improve at BT.

--An increase in expected cash requirements. An increase in cash requirements 
could be indicated if BBD does not maintain proceeds from the incremental 
increase in proposed debt as cash balances. 

Fitch has affirmed BBD's ratings as described below:
--IDR at 'BB';
--Senior unsecured revolving credit facility at 'BB';
--Senior unsecured debt at 'BB';
--Preferred stock at 'B+'.

The ratings affect approximately $5.6 billion of debt at Sept. 30, 2012 
including sale and leaseback obligations. The amount is before adjustments for 
$347 million of preferred stock, which Fitch gives 50% equity interest, and the 
exclusion of adjustments for interest swaps reported in long-term debt as the 
adjustments are expected to be reversed over time.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below