Fitch Ratings Comments on Bombardier's FY 2Q'05 Results.

NEW YORK -- Bombardier Inc.'s (BBD) fiscal-year 2005 second quarter (FY 2Q'05) financial results were consistent with Fitch Ratings' expectations for BBD's performance at the current rating levels. Margin levels and the regional jet (RJ) backlog remain concerns, but BBD made progress on its restructuring plan by reporting positive net income and free cash flow in the quarter. BBD's and Bombardier Capital's (BC) senior unsecured debt is currently rated 'BBB-' by Fitch. The Rating Outlook is Stable. Due to the existence of a support agreement and demonstrated support by the parent, BC's ratings are linked to those of BBD.

Margin improvement continues to be the key credit issue for BBD's debt ratings. As expected, FY 2Q'05 EBT (earnings before taxes) margins fell compared to FY 2Q'04, but improved compared to this year's first quarter. Given BBD's level of debt compared to revenues, relatively modest improvement in margins will drive noticeable improvement in credit protection measures. However, failure to improve margins or the discovery of additional problem contracts at Bombardier Transportation (BT) will likely lead to a review of the ratings.

Fitch considers the restructuring program at BT to be on track, and two facilities were closed in the second quarter, both ahead of schedule. Margins at BT were 2.8% in the second quarter. At Bombardier Aerospace (BA), margins were negative (-0.6%) for the second consecutive quarter, but improved sequentially. BA's margins continue to be pressured by sales incentives, foreign currency, increased depreciation & amortization related to new business jet programs, and higher interest expense allocation due to the debt issuance earlier this year.

BBD's free cash flow (cash from operations less capital expenditures) excluding BC was $50 million in F2Q05. For the first half of the year, BBD's free cash flow (negative $164 million) is better than the amounts incorporated into Fitch's ratings of BBD, and it is also better than the substantial cash deficit BBD typically runs in the first half of its fiscal year. BBD's free cash number this year includes a $182 million discretionary pension contribution made in the first quarter. Fitch expects BBD to be cash positive in the second half and for the year despite likely increases in capital expenditures and restructuring outflows during the next two quarters.

BBD's liquidity remained solid at the end of the second quarter, with $2.2 billion of cash and $1.6 billion of credit facility availability. An additional $600 million is available under BC's credit facilities. Fitch notes that approximately $1.2 billion of the cash on hand at BBD is related to advances and subordinated loans extended by BC to the parent. Fitch expects BBD to pay down some of the advances in the third quarter so that BC can retire approximately $500 million of maturing debt. Fitch anticipates that some additional BC advances will be repaid in Q3 to fund increased assets, which declined temporarily last quarter due to seasonal factors. BBD renewed its European 364-day credit facility in July, although the size of the facility declined by more than 10%.

Fitch continues to have several concerns related to BBD's RJ operation, including the declining backlog and its potential impact on longer-term RJ production rates, competitive pressures from Embraer's new 70-100 seat aircraft family, the cash requirements of a possible 100-seat aircraft program, the weak aircraft financing market, and backlog risks related to the weak financial conditions of several large airline customers, including US Airways, United Airlines, and Delta.

Demand for BBD's 50-seat RJ, the CRJ200, has weakened in the past year, and earlier this year BBD announced that it would reduce CRJ200 production rates beginning in the third quarter, effectively lowering F2005 deliveries by 20 aircraft. Fitch estimates that this production rate reduction on an annualized basis will lead to a significant decline in CRJ200 production in FY 2006. Partially offsetting this decline is rising demand for BBD's larger RJ models, as well as increased orders for the Q-series turboprops.

BBD is seeing improved demand and better pricing for its business jets, consistent with industry-wide conditions. Orders were up significantly in the first half of the year, and deliveries will likely exceed the company's plan this year. The magnitude of the apparent recovery in BBD's business jet operations is greater than the expectations incorporated into Fitch's ratings of BBD, and the recovery could offset some of the risk related to BBD's RJ operation.