Bombardier Default Risk Drops on VistaJet Order
The cost to insure Bombardier debt for five years using credit-default swaps fell 6 basis points to 435.85 basis points at 12:53 p.m., the biggest intraday drop among members of Canada’s benchmark Standard & Poor’s/TSX Composite Index (SPTSX), according to prices compiled by Bloomberg.
Swiss luxury air-charter company VistaJet Holding SA today ordered 56 of Bombardier’s Global aircraft, taking options for 86 more. The deal has a value of $3.1 billion, which would rise to $7.8 billion should all the planes be taken, Montreal-based Bombardier said today in a statement.
Today’s accord “establishes the Global as the predominate large-cabin ultra-range business aircraft,” Walter Spracklin, an analyst at RBC Capital Markets in Toronto, said in a note to clients. “The order goes a long way as well in terms of shoring up Bombardier’s underlying business jet segment with further revenue visibility, higher margin expectations and cash-flow generation throughout the delivery cycle.”
Credit swaps typically fall as investor confidence improves and rises as it deteriorates. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Bombardier said Nov. 7 it expects cash flow in the aerospace unit this year to trail capital expenditures by about $800 million. Chief Financial Officer Pierre Alary blamed the gap on a lower-than-expected level of advances from plane buyers.
Today’s accord will buoy Bombardier’s balance sheet by generating “prepayments and progress payments as the order heads into delivery in 2014,” Spracklin said. “Prepayments are generally higher for in-production aircraft, which comprises the majority of the VistaJet order.”
The sale marks a second significant win for Bombardier, which in June reached a $7.3 billion agreement for as many as 275 of its Challenger aircraft with the NetJets unit of Buffett’s Berkshire Hathaway Inc. (BRK/A) Purchases of private aircraft had languished amid a recession and the global financial crisis that intensified in late 2008.
VistaJet’s order comprises 25 Global 5000 planes, which can seat 20 people and connect San Francisco with Seoul, 25 Global 6000s seating eight and able to fly from London to Tokyo, and six Global 8000s that can also carry eight and travel 7,900 nautical miles (14,630 kilometers) to link New York with Hong Kong. The options are for 40 each of the 5000 and 6000, plus six 8000s.
Bombardier’s widely traded Class B stock climbed 8.2 percent to C$3.38 in Toronto after gaining as much as 9.6 percent. That was the most intraday since June 12, after the NetJets agreement was announced the previous evening.
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