CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the Issuer Default Rating (IDR) and long-term ratings for Bombardier Inc. (BBD) to 'BB-' from 'BB'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
The downgrade of BBD's ratings reflects Fitch's expectation that future improvements in negative free cash flow and high leverage will occur later than anticipated as a result of BBD's announcement that entry into service for the CSeries will be delayed into the second half of 2015. The new date would be at least 18 months later than initially projected when BBD launched the CSeries program. Entry into service for the CS300, which has received more than two-thirds of firm orders for the CSeries, would occur approximately six months later. Fitch believes the delay will increase development costs for the program, defer anticipated debt reduction, raise the overall risk of the program, and possibly result in penalties.
FCF may not become solidly positive on an annualized basis until late 2015 as development spending declines beginning in 2014 for the CSeries and several other aircraft. Near term pressure on FCF includes CSeries development spending, ongoing margin pressure at both Bombardier Aerospace (BA) and Bombardier Transportation (BT), and slower aircraft orders which constrains cash received from customer advances. Although BA's backlog is at a solid level, many aircraft orders are for fleet business jets and CSeries aircraft which will be delivered over several years.
BBD's total capital spending likely peaked in 2013, even considering any incremental costs for the CSeries. Free cash flow was negative $1.9 billion through the first nine months of 2013. Cash flow is typically highest in the fourth quarter which Fitch believes could reduce the amount of negative FCF for the full year.
Debt/EBITDA at Sept. 30, 2013 was 6.3x and has remained above 6x since January 2013 when BBD issued $2 billion of new debt to support liquidity during a period of significant capital spending at BA. Fitch estimates debt/EBITDA could remain near 6x into 2014 before beginning to decline as earnings slowly improve and debt is eventually reduced. Similarly, Fitch expects FFO Adjusted Leverage of nearly 5x at Sept. 30, 2013 will remain elevated.
The Stable Rating Outlook incorporates Fitch's view that BBD's credit metrics are at trough levels and that liquidity, including cash and availability under bank facilities, should be sufficient through 2014 before FCF begins to improve. However, BBD's weak credit metrics make it vulnerable to any future negative developments which, if not resolved effectively, could result in a negative rating action.
First flight for the CSeries was achieved in September 2013, nine months after the original target date. The CSeries is the largest and most important development program at BA, and the company's ability to recoup its investment and establish a competitive position in the 100 - 149 seat category will require satisfactory performance of new technologies and sufficient orders to establish a viable market for the aircraft.
There are currently 198 firm orders from 17 customers and lessees for the CSeries compared to BBD's target of 300 orders from 20 - 30 customers by the time the CSeries enters service. Program risks should decline as flight testing progresses and BBD's performance targets for the CSeries, including fuel efficiency and noise reduction, are verified.
Margin pressure at BA reflects weak demand in the smaller end of the business jet market which makes pricing difficult, but demand is better for large business jets. Low orders for business jets in the first nine months of 2013 don't include a large order that was booked with the sale of BBD's FlexJet business for approximately $195 million in the fourth quarter of 2013. Orders for regional jets and turboprops have been low as the market shifts toward larger aircraft but could increase modestly, partly reflecting increasing airline profitability. Margins will be further pressured in the medium term by the CSeries due to higher costs associated with initial production once it begins.
BT has targeted 8% EBIT margins by 2014 but has experienced recurring execution challenges on certain contracts which contributed to a segment margin of 6.5% during the first nine months of 2013. These challenges are being gradually addressed but remain a risk. BT operates in more stable markets than BA, partly reflecting significant revenue from government customers. Government spending on rail transportation is under some pressure, but BT's orders and backlog have been steady.
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. The company has continued to refresh its aircraft portfolio which should position it to remain competitive. The Global 7000 and 8000 aircraft are scheduled for entry into service in 2016 and 2017, respectively, and the Learjet 70 and 75 entered service in the fourth quarter of 2013. The Learjet 85 expects first flight in the first quarter of 2014 after a delay from the fourth quarter of 2013.
BBD's liquidity at Sept. 30, 2013 included approximately $2.6 billion of cash and availability under a $750 million bank revolver that matures in 2016. In addition, BT has a EUR500 million revolver that matures in 2015. Both facilities are unused. BA and BT also have LC facilities which are used to support performance risk and secure advance payments from customers. The bank facilities contain various leverage and liquidity requirements for both BA and BT which remained in compliance at Sept. 30, 2013. Minimum required liquidity at the end of each quarter is $500 million at BA and EUR600 million at BT. BBD does not disclose required levels for other covenants.
In addition to the two committed facilities, BBD uses other facilities including a performance security guarantee (PSG) facility that is renewed annually as well as bilateral agreements and bilateral facilities with insurance companies and banks. BA uses committed sale and leaseback facilities ($242 million outstanding at Sept. 30, 2013) to help finance its trade-in inventory of used business aircraft. In addition, BT uses off-balance-sheet, non-recourse factoring facilities in Europe under which $1.2 billion was outstanding.
Liquidity is offset by current debt maturities that totaled $216 million at Sept. 30, 2013, but additional debt maturities through 2015 are minimal. In addition to long term debt, BBD had $784 million of other current financial liabilities including refundable government advances, sale and leaseback obligations, lease subsidies and other items. BBD also has contingent liabilities related to aircraft sales and financing and to foreign currency risk. 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, which BBD estimated would amount to $458 million in 2013, could decline in 2014 due to higher discount rates and positive asset returns. BBD estimates net pension obligations declined by $663 million through the first nine months of 2013 from $2.5 billion at the end of 2012. The obligation included $736 million of unfunded plans. Funded plans at the end of 2012 were 80% funded.
RATING SENSITIVITIES
A positive rating action is unlikely in the near term. However, future developments that may, individually or collectively, eventually support a positive rating action include:
--Stronger orders and deliveries at BA;
--The CSeries enters service as planned in the second half of 2015 without significant design changes, and BBD receives sufficient orders to generate a positive return on the program;
--BT improves project execution and builds stronger margins;
--FCF improves materially as development spending for aerospace programs begins to wind down.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Inability by BBD to return to consistently positive annualized FCF by the end of 2015;
--The CSeries is delayed again, or future orders are insufficient to support profitable production levels;
--Commercial and business jet markets fail to improve;
--Operating performance at BA or BT does not strengthen sufficiently to support higher margins and FCF.
--Liquidity is insufficient to carry BBD through the current development cycle at BA.
Fitch has downgraded BBD's ratings as follows:
--IDR to 'BB-' from 'BB';
--Senior unsecured revolving credit facility to 'BB-' from 'BB';
--Senior unsecured debt to 'BB-' from 'BB';
--Preferred stock to 'B' from 'B+'.
The Rating Outlook is Stable.
The ratings affect approximately $7.3 billion of debt at Sept. 30, 2013. The amount includes sale and leaseback obligations and is adjusted for $347 million of preferred stock which Fitch gives 50% equity interest. The debt amount excludes 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'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 23, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis — Effective Dec. 15, 2011 to Dec. 13, 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656516
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=815410
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