Fitch Withdraws Rating on Bombardier's New Notes
Fitch Ratings has withdrawn its 'BB' rating on Bombardier Inc.'s (BBD) cancelled issuance of approximately $1 billion of senior unsecured notes planned in mid-November 2012. Proceeds were intended to support BBD's liquidity during a period of high development spending on new aircraft programs including the CSeries. A detailed ratings list is provided at the end of this release.
At Sept. 30, 2012, BBD's liquidity 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. Other facilities include a performance security guarantee (PSG) facility, various bilateral agreements, committed sale and leaseback facilities and off-balance-sheet non-recourse factoring facilities at BT. Liquidity is offset by current debt maturities that totaled $46 million at Sept. 30, 2012. 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.
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, which could return to a positive level on an annual basis in 2013.
Debt/EBITDA was 4.5 times (x) at Sept. 30, 2012 compared to 3.3x at the end of 2011. The increase in leverage 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. First flight of the CS100 is scheduled to occur by the end of June 2013, roughly six months later than originally expected, with entry into service one year later. Entry into service for the CS300 is expected by the end of 2014. The delay of first flight for the CS100 announced in November 2012 does not increase project costs, but BBD may incur some penalties, and the delay slightly extends the negative cash cycle.
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 expects 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 recovers.
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 ratings include:
--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 demand;
--FCF fails to improve at BT.
Fitch currently rates BBD as follows:
--Issuer Default Rating 'BB';
--Senior unsecured revolving credit facility 'BB';
--Senior unsecured debt 'BB';
--Preferred stock 'B+'.
The Rating Outlook is Stable.
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. 15, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
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