TEXT - Fitch affirms Bombardier Inc BB ratings
Jan 10 - Fitch Ratings has affirmed the Issuer Default Rating (IDR) and long-term ratings for Bombardier Inc. (BBD) at 'BB', including the 'BB' rating previously assigned to BBD's proposed issuance of senior unsecured notes which are being offered under Rule 144A. BBD increased the amount of the proposed notes to approximately $2 billion from $1 billion. The Rating Outlook is Stable. A full rating list is provided at the end of this release. The new debt will include $750 million of 4.25% three-year notes due 2016 and $1.25 billion of 6.125% 10-year notes due 2023. Proceeds will be used for general corporate purposes and will support BBD's liquidity during a period of high development spending on new aircraft programs including the CSeries. Fitch expects the increase in the amount of the new debt will be used to support higher cash balances, and believes BBD's cash requirements for capital expenditures and other uses have not increased since the ratings were downgraded one notch in November 2012. Fitch estimates pro forma debt/EBITDA, including the new debt, would be approximately 6.0 times (x) at Sept. 30, 2012 compared to 4.4x as reported and 3.3x at the end of 2011. The increase in leverage since the end of 2011 also reflects $500 million of new debt issued in the first quarter of 2012 and weaker earnings during the year. Credit metrics may not improve significantly until the regional aircraft and business jet markets recover and BA gets beyond its peak program expenditures. 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. FCF at BT could return to a positive level on an annual basis in 2013. 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. In the fourth quarter of 2012, BBD announced a six-month delay to the scheduled first flight of the CS100 which now is scheduled to occur by the end of June 2013, with entry into service one year later. Entry into service by the end of 2014 for the CS300 is unaffected. The change does not increase project costs, but BBD may incur some penalties, and the delay slightly extends the negative cash cycle. At BA, negative FCF includes the impact of a low level of customer advances. Although BA's backlog is at a solid level, many of the orders are for CSeries aircraft or fleet business jets which will be delivered over several years. Capital expenditures at BA totaled $1.3 billion in calendar 2011 and could be near $2 billion in 2012 and 2013. BA cut regional jet (RJ) production in early 2012 due to low industry demand. Demand for regional aircraft reflects a lack of confidence at major airlines about supporting regional air service, concerns about turmoil in Europe, high fuel prices, and airline industry capacity. However, orders increased during 2012 for commercial aircraft as well as business jets. In 2012, BA delivered 50 commercial aircraft, down from 78 aircraft in fiscal 2011 which included 11 months. Net orders improved to 138 aircraft in 2012 from 54 in the previous year. Demand for large business jets, where BA has its largest presence, is stronger than the light jet market but remains well below peak levels. In 2012, business jet deliveries were up slightly at 179 units compared to 163 units in the 11-month period of fiscal 2011. BA received net orders for 343 business jets in 2012 compared to 191 jets in fiscal 2011. At BT, increasing complexity on many projects has contributed to delays in project completion, slower collections, higher inventory, lower margins and negative FCF. Cash flow has begun to improve and should be positive in the fourth quarter of 2012. These challenges are being gradually addressed but remain a risk. BT announced it would recognize a restructuring charge of up to $150 million in the fourth quarter of 2012 directed toward cutting costs through layoffs and a plant closure. A large portion of the charge represents cash costs that are expected to occur over 12-18 months. Government spending on rail transportation is under some pressure, but BT's order and backlog remain at solid levels. BT operates in more stable markets than BA. While not currently anticipated, BT's profile could weaken if funding becomes more difficult for government customers, or if rail equipment providers such as BT are required to participate in risk-sharing agreements. 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 expected 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. BA's largest and most important development program is the Cseries, which targets the 100-149 seat segment. BA's ability to recoup its investment and establish a competitive position in the segment will require effective execution, performance of new technologies, and sufficient orders. There are currently 148 firm orders for the CSeries; this is well below BBD's target of 300 orders and 30 customers by the time the CSeries enters service. The level of new orders during the next 12-18 months will be important for the success of the aircraft and BBD's ability to develop a viable market for the aircraft. Other development programs include the Learjet 85 and Global 7000 and 8000 aircraft scheduled for entry into service in 2013 and 2016-2017, respectively. BBD's liquidity at Sept. 30, 2012 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. 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. BA uses committed sale and leaseback facilities ($215 million outstanding at Sept. 30, 2012) 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 $1,049 million was outstanding. The bank facilities contain various leverage and liquidity requirements for both BA and BT which remained in compliance at Sept. 30, 2012. 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 November 2012, BBD amended the $1,350 million facility, including the $750 million revolver and a $600 million LC facility, to provide greater near-term flexibility under the leverage covenant. The amendment mitigates potential concerns about covenant compliance if BBD's results or liquidity weaken further. Liquidity is offset by current debt maturities that totaled $46 million at Sept. 30, 2012. Annual maturities are limited to less than $200 million until November 2016 when EUR785 million of 7.25% notes come due. 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. 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. --An increase in expected cash requirements. An increase in cash requirements could be indicated if BBD does not maintain proceeds from the incremental increase in proposed debt as cash balances. Fitch has affirmed BBD's ratings as described below: --IDR at 'BB'; --Senior unsecured revolving credit facility at 'BB'; --Senior unsecured debt at 'BB'; --Preferred stock at 'B+'. 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.
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