Fitch Rates Bombardier's Planned Senior Unsecured Notes 'BB'; Outlook Stable
CHICAGO -- January 9, 2013
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 include a mix of maturities
of up to 10 years. 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 rating 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. FCF at BT 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. 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
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
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
--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.
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. 13, 2012;
--'2013 Outlook: Global Aerospace and Defense', Dec. 21, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
2013 Outlook: Global Aerospace and Defense
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