Bombardier’s New C Series Blow Erases Rally From Delta LifelineBy
Jetmaker posts biggest September decline on the TSX index
Cash burn raises concern about debt as bond comes due in 2018
The boost from Bombardier Inc.’s biggest aircraft order has vanished.
The stock just posted its worst month since January as the company’s marquee jetliner suffered another setback and concern deepened about business-aircraft demand. Bombardier’s shares fell below the level of April 27, the last trading day before the planemaker announced a $5.6 billion order for its C Series jets from Delta Air Lines Inc.
Delays in engine shipments from Pratt & Whitney prompted Bombardier to lower its C Series delivery forecast to seven planes this year from 15. That fueled questions about the planemaker’s cash flow and ability to ramp up production on the aircraft, which was two-and-a-half years late and more than $2 billion over budget when it made its commercial debut in July.
“People thought they were off to the races,” said Gimme Credit analyst Evan Mann. “Now all of a sudden, it makes you pause and think.”
Bombardier tumbled 16 percent in September, the biggest decline on the S&P/TSX Composite Index. The shares have slumped another 3.9 percent this month to C$1.73, reducing the market value of the Montreal-based company to C$3.96 billion ($3 billion). The stock gained 29 percent this year through Wednesday. It was up 1.2 percent at 10:14 a.m. in Toronto on Thursday.
Bonds also have taken a hit of late. Bombardier’s 6.13 percent note due in 2021 traded at 99.72 European cents Wednesday, down from 104.83 cents at the end of August. That’s still up from a low of 76 cents in February.
Chief Executive Officer Alain Bellemare, who took over about 18 months ago, has lowered costs and reduced staff amid the jet sale delays. Bombardier announced 7,000 job cuts in February -- the third round of payroll reductions in about a year -- after paring output of the Global 5000 and 6000 business plane and canceling the smaller Learjet 85. Bellemare’s five-year plan aims to restore profitability and overcome the cost overruns and delays that beset the $6 billion C Series program. Bombardier raised $2.5 billion this year by selling stakes in the C Series and the company’s train unit to the Quebec government and the province’s largest pension fund.
While analysts laud Bellemare’s efforts, some worry about Bombardier’s debt load and cash flow.
Bombardier had $8.96 billion of long-term debt at the end of June and $4.4 billion of accessible liquidity -- a figure that climbed to $4.9 billion on Sept. 1 after Quebec completed a $1 billion investment in the C Series. The company’s next maturity occurs in 2018 on $1.4 billion in bonds.
“Alain has done all the right things, but if the environment shifts on him he’s at the mercy of the forces he can’t control,” said David Tyerman, a Cormark Securities analyst. “When you carry tons of debt, you don’t give yourself much leeway.” The C Series engine delay will erode cash flow this year by an additional $150 million, Bombardier has said.
While the engine problem wasn’t Bombardier’s fault, “it’s bad timing,” said Todd Johnson, a fund manager at BCV Asset Management, which holds bonds of the planemaker. “The company doesn’t need any more delays in the project.”
Meanwhile, concern mounts over Bombardier’s business-jet division -- the company’s most profitable unit -- amid a glut of used private planes.
Business-jet deliveries are expected to drop 6.4 percent this year to 645 aircraft, Seth Seifman, an analyst at JPMorgan Chase & Co., said in a Sept. 22 report. He predicted a decline to 625 jets next year.
Bellemare says business-jet sales eventually will rebound. Most of the cutbacks already have been made, he said Sept. 28 in a speech to the Empire Club of Canada.
“The Russian market is down, the Chinese market is down, the Middle East is soft, there’s softness in Europe, softness in the U.S.,” he said. “But in the long run, this is a very strong business segment.”
S&P Global Ratings on Sept. 23 lowered Bombardier’s credit rating to B-, six levels below investment grade. Relatively soft demand for business and commercial jets in the next two to three years will probably limit cash-flow improvement, S&P said.
“The business-jet market is weak, and the commercial side of the business is also not doing so well,” said Aniki Saha-Yannopoulos, an analyst at S&P.
S&P’s opinion “fails to recognize the significant progress we’ve made de-risking our programs and improving our liquidity,” Bombardier said by e-mail. “Our turnaround plan is on track.”
The company aims to break even on cash flow in 2018, when that $1.4 billion of debt comes due. But analysts estimate the company will burn through $226 million that year and take until 2019 to generate cash, according to data compiled by Bloomberg.
Before that, Canada’s federal government could provide some cushion by investing in the C Series or the company itself. The government has been in talks with the planemaker though hasn’t any financial commitment.
Even better would be a sales win, said Johnson, of BCV Asset Management.
“What I’m waiting for now is the next C Series order,” he said. “It’s been a while.”