Fitch Ratings has downgraded the debt and Issuer Default Ratings (IDR) for both Bombardier Inc. (BI) and Bombardier Capital Inc. (BC), as listed below:
Bombardier Inc.
--IDR to 'BB-' from 'BB';
--Senior unsecured debt to 'BB-' from 'BB';
--Credit facilities to 'BB-' from 'BB';
--Preferred stock to 'B' from 'B+'.
Bombardier Capital Inc.
--IDR to 'BB-' from 'BB';
--Senior unsecured debt to 'BB-' from 'BB'.
The ratings are removed from Rating Watch Negative, where they were placed on Oct. 23 over concerns about potential changes in Bombardier's financial strategy. The Rating Outlook is Stable.
Fitch also expects to assign a 'BB-' rating to Bombardier's proposed EUR1.8 billion issuance of senior unsecured bonds. The rating actions listed above are based on the expectation that Bombardier will complete the bond issuance, a related tender offer, and the proposed new letter of credit (LC) facility as described in materials distributed by the company.
These ratings cover outstanding debt and preferred stock totaling approximately $4.2 billion, which could rise to more than $5.0 billion after the pending tender offer and bond issuance are completed. Due to the existence of a support agreement and demonstrated support by the parent, BC's ratings are linked to those of BI.
The downgrade is based on what Fitch considers to be a change in Bombardier's financial strategy, which had included plans for significant debt reduction. Fitch's previous ratings had incorporated expectations for debt reduction in fiscal 2007, and possibly in fiscals 2008 and 2009. Bombardier recently announced three financial transactions (EUR1 billion tender for BI and BC debt, EUR1.8 billion bond issuance by BI, and a new LC facility) which will offset most of the approximately US$1 billion of debt reduction achieved so far in fiscal 2007 and will likely defer additional debt reduction to beyond fiscal 2009. The transactions extend debt maturities, resolve some possible covenant pressures in fiscal 2008 and lower Bombardier's LC fees. However, Fitch believes that the transactions will result in Bombardier having higher leverage that is in line with the new rating level.
Pro forma for the financial transactions, Fitch estimates that fiscal 2007 consolidated gross leverage (gross debt to EBITDA) will be in the 4.6x-4.9x range. Fitch estimates that consolidated net leverage (net debt to EBITDA) will be in the 2.6x-2.9x range, although Fitch estimates that net leverage will be higher for most of fiscal 2008 due to Bombardier's seasonal working capital needs. After the financial transactions, all debt will be located at BI with the exception of BC's GBP300 million issue due in May 2009 and untendered bonds, if any.
The net leverage estimates assume US$1.8 billion-US$2.2 billion of unrestricted cash balances at the end of F2007. Bombardier will also have approximately US$1.0 billion of restricted cash balances related to the new LC facility. These restricted cash balances are not available for liquidity purposes or for the benefit of unsecured bond holders. Bombardier's unrestricted cash balances will be the company's sole source of liquidity because the new LC facility is not available on a revolving credit basis.
Factors supporting the ratings and Outlook include the company's diversification, leading market positions, the health of the business jet and turboprop markets, cash balances, revised debt maturity schedule, Bombardier Transportation's (BT) successful restructuring, and large backlog at BT. Concerns include the variability of free cash flow due to order flow at BT and Bombardier Aerospace (BA); continued low margins and free cash flow; the levels of consolidated gross debt compared to EBITDA and free cash flow; business jet market cyclicality; the sizable pension plan deficit; the impact of exchange rate volatility on financial results and planning; and various regional jet concerns, including weak orders, uncertainty regarding development of new aircraft models, and contingent obligations related to past aircraft sales.
Previously, Fitch calculated BI's credit metrics on a deconsolidated basis accounting for BC as an equity investment. This methodology was used for several reasons: consistency with the way other industrial companies with sizable finance subsidiaries are evaluated in the credit markets; the size of BC's operations and the amount of BC's outstanding debt; the fact that BC's debt was neither an obligation of BI nor guaranteed by BI; and the calculation of BI's covenants, which excluded BC. Going forward Fitch will calculate Bombardier's credit metrics on a consolidated basis, for the following reasons. BC's assets and pro forma debt have declined substantially in the past several years. In addition, Bombardier's covenants will be calculated on a consolidated basis for the new LC facility. Finally, Bombardier revised some of its financial reporting earlier this year, and it now reports only consolidated financial results.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.