Fitch Ratings assigns a rating of 'BB' to Bombardier Inc.'s (BBD)
proposed issuance of approximately $1 billion of senior unsecured notes
which are being offered under Rule 144A. The fixed rate notes will
mature in 2020 and 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. The
Rating Outlook is Stable. A detailed ratings list is provided at the end
of this release.
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, which could return to a positive level on an
annual basis in 2013.
Fitch estimates pro forma debt/EBITDA, including the new debt, would be
approximately 5.3 times (x) at Sept. 30, 2012 compared to 4.5x as
reported and 3.3x at the end of 2011. The increase in leverage also
reflects $500 million of new debt issued in the first quarter and weaker
earnings during 2012. Credit metrics may not improve significantly until
the regional aircraft and business jet markets recover and BA gets
beyond its peak program expenditures.
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. Last week, 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. Demand for
large business jets, where BA has its largest presence, is stronger than
the light jet market but remains well below peak levels.
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 expects 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 138 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.
At Sept. 30, 2012, BBD's liquidity 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. On Nov. 9, 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.
WHAT COULD TRIGGER A RATING ACTION
Positive: A positive rating action is unlikely until FCF stabilizes, but
future developments that may, individually or collectively, lead to
higher ratings include:
--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
--FCF fails to improve at BT.
Fitch currently rates BBD as follows:
--Senior unsecured revolving credit facility 'BB';
--Senior unsecured debt 'BB';
--Preferred stock '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.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage', Aug. 8, 2012;
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis', Dec. 15, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
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