DBRS Confirms Bombardier Inc. at B with a Positive Trend

DBRS Limited (DBRS) confirmed the Issuer Rating of Bombardier Inc. (Bombardier or the Company) at B with a Positive trend. This action reflects the improved operating performance over the last two quarters since the last rating action taken on June 1, 2018, when DBRS changed the trend to Positive from Stable. Normalized EBITDA improved to $1,159 million in the last 12 months (LTM) ended Q3 2018 period, compared with $998 million in the Q1 2018 LTM period. Operating cash flow improved to $256 million from a cash burn of ($274 million). These results were driven primarily by the stable performance and elevated margins in the rail and business aircraft divisions and lower losses in the commercial aerospace segment. The rating continues to be supported by the Company’s 72.5% holding in Bombardier Transportation (BT) and its strong business aircraft operation, including the recently certified ultra-long-range Global 7500. The business risk profile continues to face structural challenges, including volatile aircraft end markets and significant product development risks.

A significant development in Q3 2018 was the admission by Bombardier that the delivery ramp-up at BT would extend into 2019, beyond previous guidance that this would be largely accomplished in H2 2018. This resulted in a greater-than-expected working capital build and lower-than-expected deliveries and cash generation. Therefore, the 2018 free cash flow break-even guidance, reiterated as recently as Q2 2018, will not be achieved. However, the 2018 EBITDA guidance was affirmed and the BT working capital build is expected to be “largely recovered” in 2019, according to the Company. DBRS does not view this delay as a structural problem in Bombardier’s business or trajectory over the medium term, and liquidity is sufficient in the near term. Note that the Company has not revised its 2020 goals, and its efficiency-generating transformation program continues, with an additional 5,000 layoffs being recently announced.

The sale of the Q400 (and possibly the CRJ program) will have a modest unfavourable impact on the Company’s diversification. That said, greater focus on the higher-margin and growing rail and business jet businesses is having an offsetting favourable impact on operating efficiency. DBRS projects the Company’s financial risk profile to strengthen further into the B range in 2019 as it commences its expected deleveraging phase, with the achievement of BB-range metrics in 2020.

DBRS will be monitoring the seasonally important Q4 2018 results closely for more clarity regarding the BT ramp-up, confirmation that the traction in the recovery of the global business aircraft market is continuing and further insight into the potential for Bombardier to achieve its 2019 targets, which include free cash flow break-even +/- $250 million. Further evidence that key guidance targets are achievable could lead to an upgrade; alternatively, the trend could revert back to Stable.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Rating Companies in the Industrial Products Industry, which can be found on dbrs.com under Methodologies.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.