DBRS Confirms Bombardier Inc. and Bombardier Capital Ltd. at BB and Pfd-4 with Negative Trends

Dominion Bond Rating Service (DBRS) has today confirmed the ratings of Bombardier Inc. and Bombardier Capital Ltd. (together, Bombardier, or the Company). The Senior Unsecured Debentures of both Bombardier Inc. and Bombardier Capital Ltd. are confirmed at BB, and Preferred Shares of Bombardier Inc. at Pfd-4. All trends are Negative.

The credit outlook remains negative, as several elements of uncertainty – both operational and financial – surround Bombardier. Foremost, in DBRS’s view, the Company has not articulated a turnaround strategy for its struggling regional jet business, where shifting market dynamics continue to depress this sector.

The viability of several U.S. regional airlines is in question as some have not emerged from bankruptcy protection and some contend with untenable cost structures. This has resulted in diminished aircraft orders in recent years. Although some aircraft with favourable economics, such as 100+ seat regional jets, are experiencing robust demand, Bombardier is at a competitive disadvantage because it does not manufacture this size aircraft. Chief rival, Embraer, has become a more formidable competitor and has had success with its 100+ seat jets. For example, as of the recent quarter-end, regional jet backlog (in units) for Bombardier was 73 and for Embraer was 359. While Bombardier is currently reviewing plans to introduce a comparable jet, DBRS believes that stretching the CRJ900 would be a temporary solution and will still leave the Company vulnerable in this segment. Furthermore, Embraer has first-mover advantage, which enables it to bolster its market presence in the meantime.

The credit profile is also pressured by high financial risk, despite recent improvement in ratios due to debt reduction and margin expansion. Total debt levels remain excessive, and EBITDA interest coverage is weak at 2.78 times. However, it appears that the Company is committed to reducing debt, which should be facilitated by expected free cash flow over the near term. In addition, its debt maturity schedule is manageable, and liquidity is reasonable with $3.2 billion available, which broadens financial flexibility.

Overall, the ratings remain sensitive and could be downgraded if Bombardier doesn’t gain traction in the regional jet segment over the near term or if cash flow diminishes. This underscores the importance of solid performance in Bombardier’s other major businesses: the business jet business has had very strong growth, which is expected to continue over the near term;. the transportation business appears to have stabilized with cost control. Both are key to underpinning Bombardier’s credit profile.

Notes:
All figures are in U.S. dollars unless otherwise noted.
These ratings are based on public information.