Bombardier May Refinance 2016 Euro Bonds to Reduce Costs

Bombardier Inc., the world’s third-biggest planemaker, may refinance 785 million euro ($1.08 billion) of bonds due in 2016 with U.S. dollar-denominated debt to lower borrowing costs and extend maturities.

“We have a debt that we can call at very little premium, and the markets are good,” Chief Executive Officer and President Pierre Beaudoin said yesterday in an interview at Bloomberg headquarters in New York. “Our coupon is 7.25 percent, and today the markets say that we can finance for less than that. I say: ‘OK, let’s look at it.’”

Bombardier is seeking to cut financing costs as it works to rein in capital expenditures after racking up delays in developing the CSeries, its biggest ever jet. Bombardier said last month it plans to spend $4.4 billion to develop the two versions of the CSeries -- $1 billion more than targeted when the company decided to proceed with the program in 2008.

The euro bonds due in November 2016 can be called starting April 21 at 101.21 cents on the dollar. Savings from a new debt sale would be “substantial,” Beaudoin said, declining to be more specific. The yield on the bonds fell 4 basis points to 6.12 percent as of 8:43 a.m., Bloomberg data show.

Moody’s Investors Service and Standard & Poor’s both downgraded Bombardier last month after the Montreal-based company said it would miss 2014 profit goals. Moody’s cut its rating to Ba3, its third-highest junk ranking, from Ba2, while S&P cut the debt to BB- from BB, citing negative cash flow. DBRS Ltd. said Feb. 21 its BB (low) rating would remain unchanged following a November downgrade.

Dollar Debt

Besides the CSeries, Bombardier is also developing the Learjet 85, Global 7000 and Global 8000 business jets. Spending on new aircraft is typically incurred in U.S. dollars. Although it’s based in Canada, Bombardier reports in U.S. dollars.

“It’s going to be U.S. dollars,” Beaudoin said of the proposed debt issue. “Sometimes we do euros because we have a need for euros, but right now we are doing airplane development, which is in U.S. dollars.”

Capital expenditures in the aerospace business will be in a range of $1.6 billion to $1.9 billion this year and total $1.2 billion to $1.5 billion in 2015, Bombardier said Feb. 13.

Bombardier had long-term debt of $6.99 billion as of Dec. 31, up from $5.36 billion a year earlier.

Available short-term capital resources amounted to $4.8 billion at Dec. 31, including cash and cash equivalents of $3.4 billion, Bombardier said last month. That compares with $4 billion and $2.6 billion respectively a year earlier.

Currency Tailwind

The liquidity is sufficient to fund all of the company’s new products, Beaudoin said. Even so, the company is weighing issuing more debt than the bonds it would retire to give itself a buffer, he said.

“We’ve got room to take on a little bit more,” Beaudoin said. “If you look at the available liquidity with our line of credit at $4.8 billion, we’ve got the room to do what we need to do in terms of developing the product. But it’s airplane development, so if we can take on a little bit more security, it will make my CFO happy. We’ll see.”

Canada’s weakening currency is a boon to Bombardier, which incurs about $3 billion of costs in its home country annually. Every one-cent decline in the value of the Canadian currency lowers annual costs by $29 million, Beaudoin said.

The Canadian dollar has weakened 8.5 percent against the U.S. dollar in the past year.

“I was in charge of aerospace when the dollar was at 60 cents and it climbed to parity. Of course I complained all the way through,” Beaudoin said. “It made our business more competitive at par because it forced us to rethink our approach. Now we are competitive at par, and now we are living the tailwind rather than the headwind. We hedge everything we do, so we will have a soft landing.”

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