TEXT - S&P withdraws Bombardier 'BB' issue-level rating
Overview -- We are withdrawing our 'BB' issue-level rating, and '4' recovery rating, on Bombardier Inc.'s proposed US$1 billion of unsecured notes. The company has decided to not issue these notes. -- We are also affirming our 'BB' long-term corporate rating on Bombardier. -- While Bombardier's decision to not issue debt at this time will mean a somewhat better leverage ratio, with an adjusted debt-to-EBITDA ratio of about 6.3x compared with 7.0x for 2012, the company will not benefit from US$1 billion in additional liquidity. -- We continue to view Bombardier's current liquidity position, with a US$2.1 billion cash balance, as adequate, but there is less cushion if capital expenditures were to increase due to delays in the CSeries programs. -- The stable outlook reflects our expectations that the company will continue to generate strong cash flows and credit metrics will improve over the next two years. Rating Action On Nov. 20, 2012, Standard & Poor's Ratings Services withdrew its 'BB' issue-level rating, and '4' recovery rating, on Bombardier Inc.'s proposed US$1 billion of unsecured notes. The company has decided to not issue these notes. At the same time, Standard & Poor's affirmed its 'BB' long-term corporate rating on Bombardier. The outlook is stable. While the company's decision to not issue debt at this time will mean a somewhat better leverage ratio, with an adjusted debt-to-EBITDA ratio of about 6.3x compared with 7.0x for 2012, Bombardier will not benefit from US$1 billion in additional liquidity. We continue to view the company's current liquidity position, with a cash balance of US$2.1 billion, as adequate but there is less cushion if capital expenditures were to increase due to delays in the CSeries programs. Rationale The ratings on Bombardier reflect what we view as the company's satisfactory business risk profile and aggressive financial risk profile. Our ratings take into consideration Bombardier's leading market positions in the transportation and business aircraft segments, its good cost efficiency, and increasing product range and diversity. These positive factors are partially offset, in our opinion, by the financing pressure Bombardier's customers face in the aerospace and transportation divisions, significant execution risk in the launch of its upcoming CSeries jet, increasing leverage, and weakening cushion under the financial covenants. Bombardier is engaged in the manufacture of transport solutions worldwide. It operates in two distinct industries: aerospace and rail transportation. It has 69 production and engineering sites in 23 countries, and a worldwide network of service centers. The company is a market leader globally in rail, especially in Europe, which is considered the largest market for rail at about 60%. Bombardier is also considered to have the largest market share in the business jet segment at about 37% and the second-largest in the commercial jet segment (about 38%). These businesses have high barriers to entry and require substantial investments in capital, technical, and project integration skills, as well as a reputation building. We believe Bombardier offers a comprehensive range of business aircraft of different sizes, and that its transportation division has a well-established track record in Europe, with increasing order acquisitions in the more rapidly growing Asian markets. This provides credit strength in our assessment of the company's competitive position. We believe that Bombardier's transportation business has provided crucial support to the company's cash flows and expect this to continue until there is a more sustained meaningful recovery in its aerospace business. We are concerned that delays in deliveries, as seen in 2011, or reduced customer advances due to the weak global economy could reduce cash flows from the transportation division. We expect the unit's book-to-bill ratio to remain over 1x this year and the backlog to remain at about three years as European countries continue to invest in their rail infrastructure despite the current economy. While the transportation division has a large exposure to Europe, it has limited (below 10%) exposure to Portugal, Spain, and Italy, and most of this is for service contracts. The division does not have any contracts with Greece. The company's regional jet business has been performing below expectations with an EBIT margin of below 6%. For the first nine months ended Sept. 30, 2012, orders for commercial aircrafts were up slightly from the previous year (138 versus 133), while deliveries were about half of those in 2011 (34 versus 67). While business jet orders have been in line with expectations, customer advances have been lower, which is a key source of liquidity to help fund heavy capital expenditure related to the CSeries programs. Further constraining the business is the development of the CSeries aircraft, expected to be delayed by six months mainly due to supplier issues. The company now expects the first flight for the programs in mid-2013. Although Bombardier expects no significant increase in capex related to recently announced delays to the CSeries programs, Standard & Poor's recognizes that additional delays could lead to order losses and an increase in capex. The CSeries orders have been below our expectations, with 138 firm orders so far. The company is maintaining its target of 300 firm orders by the time of launch. However, it will have to directly compete against Boeing Co. (A/Stable/A-1) and Airbus (not rated) in this category. On the business jet front, Bombardier continues to hold a leading position in the industry, which was hard hit in the 2008-2009 economic downturn. The industry has begun to recover, with increasing order flow and lower cancellations, and we believe Bombardier continues to maintain market share. However, overall demand for new aircraft will likely remain low due to the lingering effects of the global recession and a growing used business jet market. It might be several years before demand returns to pre-recession levels. We consider the company's financial risk profile as aggressive. While we believe that management is committed to a moderate financial policy, weak cash flow generation and heavy capex have resulted in weakening credit metrics. Furthermore, the decrease in the discount rate related to pensions has resulted in a significant increase in the company's pension deficit, leading Standard & Poor's to adjust the debt for pension deficit to US$2.3 billion for 2011 from US$1.3 billion in the previous year. As a result, our adjusted leverage ratio is 6.9x as of Sept. 30, 2012. Even if we were to remove the effect of the lowered discount rate, adjusted leverage would be about 6x. Given weaker-than-expected performance year-to-date, and expectations of lower order intake in 2013 and 2014 than previously forecast, we expect leverage to be about 6.3x at the end of 2012 and gradually improve to 5.5x at the end of 2013 and about 4.0x by the end of 2014. Our forecasts are based on following assumptions: -- Consolidated revenue to decline by about 7.5% in 2012 and rise by about 4.5% in 2013; -- EBITDA margins to be 7.6% in 2012 and improve to 8.2% in 2013; -- The company issues US$1 billion of notes; and -- Free cash flow usage to be about US$500 million in the next two years and to become positive in 2014. Our cash flow protection levels as measured by funds from operations (FFO) to total debt are below 15% but should improve to about 15% by year-end 2013 and to about 20% by the end of 2014. These ratios do not take into account the nearly US$2.1 billion of cash on the company's balance sheet used for working capital needs. Liquidity Standard & Poor's views Bombardier as having adequate liquidity. While sources are expected to exceed uses by more than 2x in the next 12-24 months despite heavy capex, we expect the headroom under the company's leverage covenant to be below 30% in 2012, which does not meet the threshold for strong liquidity under our criteria. While we expect the cash position to improve in 2012 as the company works through delayed deliveries from 2011, we are concerned that further delays in deliveries, as seen in 2011, or a decline in customer advances, could further constrain liquidity in light of expected large capital expenditure in the next two years. The company's cash position has declined by about US$1.2 billion in the first nine months of 2012. The company's debt maturity profile is favorable with no major debt due until 2016 other than the US$161 million notes maturing in 2014, which we expect the company to refinance as they come due. Recovery analysis For the complete recovery analysis, see the recovery report on Bombardier to be published on RatingsDirect on the Global Credit Portal following this report. Outlook The stable outlook reflects our expectations that Bombardier will continue to generate strong cash flows and that credit metrics will improve in the next two years, although the heavy capex related to the CSeries will mean debt levels will remain flat. We also view that the company will have sufficient liquidity between cash on hand and positive cash generation from it rail segment to fund heavy capex related to the CSeries programs. A further downgrade is possible if lower customer advances and additional delays in the CSeries programs lead to greater-than-expected negative free cash generation and liquidity becomes less than adequate as per our criteria. This could ultimately lead to delays in any improvement to the adjusted leverage ratio from our current expectations in the next year-and-a-half. Under the current business conditions, we believe an upgrade is unlikely in the near term. Nevertheless, when what we view as more normal and stable market conditions return and the company successfully launches the CSeries, we could consider revising the outlook to positive or raising the rating on Bombardier if in turn the company improves its financial measures, with adjusted debt to EBITDA falling below 4x or adjusted FFO to debt reaching 20% on a sustained basis. Related Criteria And Research -- Criteria - Corporates - Industrials: Key Credit Factors: Methodology And Assumptions On Risks In The Aerospace And Defense Industries, June 24, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Bombardier Inc. Ratings Withdrawn To From US$1 billion sr unsecured debt NR BB Recovery rating NR 4 Ratings Affirmed/Ratings Unchanged Corporate credit rating BB/Stable/-- Senior unsecured BB Recovery rating 4 Preferred Stock Canada scale P-4 Global scale B+ NR-Not rated.
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