Fitch Affirms BBD's Ratings At 'A-'; Revises Outlook To Neg.

Business Editors

NEW YORK--(BUSINESS WIRE)--Sept. 18, 2002

Fitch Ratings affirms its ratings on Bombardier Inc. (BBD) and Bombardier Capital (BC), and has revised the Rating Outlook to Negative from Stable. Fitch rates BBD's and BC's senior unsecured debt and bank facilities 'A-', BBD's preferred stock 'BBB+', and BBD's and BC's commercial paper programs 'F2'. Due to the existence of a 'keep-well' agreement BC's ratings are linked to Bombardier's ratings. Debt totaling C$13.9 billion is covered by these ratings.

The Negative Rating Outlook is based on the weak business jet market, BBD's declining business jet market share based on units, and the impact these factors are having on BBD's free cash flow.

BBD's ratings reflect its leading market position across all business units, especially regional jets and rail transportation; large backlog; the more conservative strategy and portfolio at BC; diversification both by business and geography; and solid regional aircraft performance in a weak commercial aviation environment. The company's liquidity position and the improved performance in the Recreational Products division also support the ratings. Concerns center on historically high debt levels, the uncertain impact airline bankruptcies could have on the regional jet market, exposure to BC's aerospace portfolio, and the pension plan deficit, as well as the business jet concerns noted above.

As of July 31, 2002 Bombardier's net liquidity position was C$2.86 billion, consisting of C$392 million in cash and availability of C$3.27 billion under its credit facilities, offset by C$807 million in current maturities. Gross debt increased C$1.7 billion in the first half to C$5.1 billion, or 52.6% of total capital. Higher first-half debt levels are typical of BBD's cash flow cycle, but the current debt amount is also a product of last year's large use of cash resulting from acquisitions, inventory build-up, and high capital expenditures.

Fitch expects BBD to reduce debt significantly through the end of the year using free cash flow. BBD plans to generate C$1.3 billion in free cash flow in FY2003, down from the company's previous estimate of C$1.5 billion. Through July 31 BBD generated negative C$1.2 billion in free cash flow. BBD needs to generate C$2.5 billion in the second half to reach its objective for the fiscal year ending January 31, 2003. Fitch notes that strong second half cash generation is consistent with BBD's historical performance. In the past, when it was a smaller company, BBD generated as much as C$1.85 billion of second half free cash. Working capital reduction is key to BBD's debt reduction plans. Fitch estimates that lowering working capital to January 2002 levels will enable BBD to reduce debt to a level more consistent with its current rating.

The primary cause of BBD's recently reduced financial outlook is weakness in the business aircraft market, driven by the soft economy and low corporate profitability. Going into FY2003, Bombardier expected to deliver approximately 140 business aircraft, but it now targets 100 deliveries, a 38% reduction versus FY2002 and less than half of FY2001 production. The revised delivery forecast is a result of recent weakness in demand for large business jets, as illustrated by several recent cancellations. BBD had previously seen weak demand for smaller jets. BBD's unit market share dropped in FY2002, and based on current delivery estimates, it is likely that BBD will lose unit market share again in FY2003. However, the company estimates that revenue market share rose in the first half.

Bombardier's regional jet segment continues to perform well, and Fitch believes the themes driving regional jet growth are intact: favorable economics versus larger jets; turboprop replacement; substitution on large jet routes; and the addition of 'long, thin' routes. While most commercial aircraft manufacturers face production declines in 2002, BBD expects to increase regional jet deliveries to 190 from 165. Deliveries through six months were 74 jets compared to 68 last year, and backlog at July 31 stood at 491 jets. BBD's regional airline customers continue to add routes, and are generally profitable. There have been only five delivery cancellations this year, delivery deferrals have been minimal, and there are few parked regional jets. However, there were only 36 first half orders. Most of these orders appear to be the result of the Fairchild-Dornier bankruptcy.

The primary uncertainty facing the regional jet market is the financial health of the mainline carriers and the impact on regional affiliates. The near-term impact is unclear, but Fitch estimates that the restructuring of mainline carriers could be a long-term benefit to the regional jet market, as evidenced by US Air's restructuring proposal to add several hundred regional jets to its fleet. BBD's largest order exposure is to the United network, followed by Northwest and Delta. Other risks to the regional jet market include the availability of financing and scope clause restrictions. In addition, BBD's turboprop aircraft face a weak demand outlook, and current backlog is less than a year's production.

Given the poor performance of the financial markets, BBD's pension plan deficit is a continuing concern, and it could affect free cash flow in coming years. The plan's deficit at Jan. 31, 2002 was C$1.6 billion, C$1 billion of which must be funded over the long-term. Actual returns in FY2002 were more than C$600 million below expected returns, a significant amount relative to plan assets (C$3.4 billion). BBD expects FY2003 cash contributions to increase to C$179 million from C$83 million last year. Future cash contributions are dependent on investment performance, and could increase by more than C$100 million in FY2004 if investment returns are weak, according to the company.

Over the past 12 months, BC has embarked on several initiatives to improve its risk profile. The most important initiative was management's decision to exit the manufactured housing finance market and reposition BC as purely a captive finance company. While the exit from the MH business is viewed favorably, Fitch remains concerned regarding BC's leverage and capitalization as the operating lease portfolio is an area of growth. Additionally, given the limited history of regional aircraft, the sustainability of their value over the long-term may not be similar to equipment manufactured by The Boeing Co. or Airbus Industrie. As such, current depreciation may not fully reflect the change in valuation. Fitch notes that BBD announced on Sept. 11, 2002 that Brian Peters, BC's CFO, would become president of BC on Feb. 1, 2003. Peters will be BC's fourth president over the last four years. This level of turnover raises questions regarding business continuity.