DBRS Changes Bombardier’s Trend to Stable

DBRS has confirmed the ratings for Bombardier Inc. (BBD or the Company) and Bombardier Capital Ltd. (BBD Capital), and changed the trend to Stable from Negative. The trend change primarily reflects BBD’s strengthened financial profile from an improving trend in margins, continuing free cash flow generation and the generally favourable business outlook. However, the ratings continue to reflect the Company’s aggressive debt levels, exposure to weak regional aerospace market conditions and cyclical earnings.

Strength in the business jet market has been largely responsible for the growth in the Company’s margins, led by rising deliveries, prices and backlog. Favourable economic growth and corporate profitability have been the key drivers, and strong industry supply/demand fundamentals are showing few signs of easing. Business jet results are expected to continue to drive Aerospace division margin growth over the near term, and more than offset the impact of continuing weak performance in the regional aircraft segment (which has become a less significant share of BBD’s business). However, there is uncertainty regarding the potential impact of the recently publicized issues involving a small portion of the Company’s Q400 turbo prop fleet (i.e., landing gear). In addition, the relative strength in the Canadian dollar will gradually pressure margins, although the near-term impact is expected to be manageable.

With respect to the Transportation division, margins are expected to gradually improve beyond F2008, but remain relatively modest due partly to high competition. However, division margins have rebounded from weak F2004/2005 levels largely from efficiency gains (i.e., procurement, project bidding discipline) and growing demand. The strong backlog ($29.7 billion), ongoing efficiency gains and international market expansion are expected to lead to continued transportation earnings growth and remain an important contributor to cash flow.

Despite improvements in overall earnings and ongoing free cash flow, BBD’s leverage remains aggressive following debt issuances in F2007. The Company is expected to continue to generate free cash flow over the near term, but this will unlikely be sufficient to measurably reduce debt. As a result, the upside to BBD’s rating is limited in absence of a material debt reduction. In addition, the Company’s large underfunded pension ($1.8 billion) will continue to require large cash contributions. However, BBD’s liquidity position is favourable (including cash and equivalents of $3 billion), and near-term debt repayment requirements are modest. The decision to proceed with the proposed C-Series (100+ seat regional jet) launch would present several risks and could limit financial flexibility, but the impact would not be expected for several years.

Notes:
All figures are in U.S. dollars unless otherwise noted.
This rating is based on public information.