Bombardier Falls on Concern $1.3 Billion Aid Isn't Enoughby
Province to buy 49.5% of troubled CSeries, take equity stake
Jetliner costs, scrapping Learjet 85 drive $4.9 billion loss
Bombardier Inc. tumbled the most in two months amid concern that a Quebec government rescue of as much as $1.3 billion won’t be enough to end the financial drain from the tardy, over-budget CSeries jetliner.
Quebec’s $1 billion CSeries investment and plans for an equity stake in Bombardier were unveiled as the planemaker posted a $4.9 billion third-quarter loss Thursday, much of it due to the marquee aircraft. Montreal-based Bombardier also said the jet will need an additional $2 billion during the next five years.
“They may be on the ropes in some aspects of their operations,” said David Cockfield, fund manager at Northland Wealth Management in Toronto, which holds Bombardier preferred shares among about C$325 million ($245 million) in assets. “The fact they have to turn to the Quebec government and hand over half the profit potential to the Quebec government is not a good sign.”
Bombardier’s widely traded Class B shares plunged 15 percent, the biggest drop since Aug. 24, to C$1.37 at the close in Toronto. Longer-term Bombardier bonds also slumped after an initial rally.
“The company is saying they’re still going to be free-cash-flow negative through 2017, and they’re not seeing profitability on the CSeries till 2020,” said Rory Buchalter, senior credit analyst at Toronto-based high yield debt investor Monegy, which sold its Bombardier bond holdings about nine months ago. “As a longer-term debt holder there’s still uncertainty.”
Quebec’s bailout and Bombardier’s disclosures underscored the depth of the troubles centered on an aircraft plagued by overruns, missed deadlines and scant interest from major airlines. Chief Executive Officer Alain Bellemare inherited those issues and more when he was hired in February to turn around Montreal-based Bombardier.
Bellemare sought to accelerate his makeover of Bombardier, announcing the cancellation of the Learjet 85 -- which was mothballed in January, before his arrival -- and he has pushed back the larger Global 7000/8000 corporate aircraft by two years to 2018. Dropping the Learjet 85 will result in a charge of $1.2 billion, while impairment charges for CSeries tooling were $3.2 billion, Bombardier said. The company said it’s also close to the sale of a minority stake in its train unit, without being more specific.
With Bombardier reeling from such a broad array of aerospace setbacks and the stock putting up the worst returns among Canadian industrial companies, Bellemare faced challenges from analysts on a conference call over a basic question: How did things get so bad?
“The organization was overwhelmed by the number of programs,” said Bellemare, a former executive at United Technologies Corp. “We had multiple programs running in parallel, and that was very challenging for an organization of our size.”
Challenges abound for the CSeries, Bombardier’s biggest-ever model and the company’s first entrant into the narrow-body jetliner market dominated by Boeing Co. and Airbus Group SE.
Most of the extra CSeries money will be required next year, Bombardier said, following an anticipated cash drain of $1 billion this year. The plane is projected to enter service in 2016, more than two years late. It is mired in an order drought dating to September 2014, and with 243 firm purchases remains short of Bombardier’s goal of 300 by the time it’s in service.
Quebec agreed to buy 49.5 percent of the CSeries program. The province also is poised to become the largest holder of the Class B stock, with warrants to purchase as many as 200 million shares for C$2.21 each. That would be 61 percent more than Thursday’s closing price.
Under the agreement with Quebec, a new unit will be created to house the assets, liabilities and obligations of the CSeries program. Assuming the stock warrants are exercised, Quebec’s stake would represent about 8.9 percent of Bombardier’s shares outstanding, the company said.
Bombardier pledged to keep the headquarters of the CSeries partnership -- as well as a variety of activities, including manufacturing -- in the province for 20 years.
It’s not the first time that Quebec has stepped up to help the CSeries. In 2013, the province’s Investissement Quebec agency agreed to provide up to $1 billion in export credit financing to buyers of the CSeries. The financing came on top of a C$117 million reimbursable loan made to Bombardier in 2009.
“They’re not in the business of bailing out bondholders,” said Keith Bachman, head of U.S. high yield at Aberdeen Asset Management Inc. in Philadelphia. “One needs to separate ‘Hey, let’s be supportive to the company and let’s work on saving jobs in Canada’ versus ‘Let’s bail out bondholders.’ ”
Bombardier used $816 million of free cash flow in the quarter, exceeding the $551 million average of five analysts’ estimates compiled by Bloomberg. The figure is more than double the $368 million used in the same period last year.
On an adjusted per-share basis, Bombardier reported break-even profit, less than the 3-cent average of analysts’ estimates.
(An earlier version corrected the company’s plans for its railroad unit in the second paragraph.)