Fitch Ratings Lowers Bombardier to 'BBB-'; Outlook Stable.

Business Editors

NEW YORK--(BUSINESS WIRE)--March 17, 2004

Fitch Ratings has downgraded the senior unsecured debt of Bombardier Inc. (BBD) and Bombardier Capital (BC) to 'BBB-' from 'BBB'. The Rating Outlook is now Stable. Fitch has also lowered the rating on BBD's preferred stock to 'BB+' from 'BBB-' and has maintained the commercial paper rating at 'F3'. Due to the existence of a support agreement and demonstrated support by the parent, BC's ratings are linked to those of BBD. These ratings cover approximately C$9 billion of debt and preferred stock.

The downgrade is based primarily on BBD's relatively flat EBT (earnings before taxes) margins in fiscal 2004(F2004) compared to F2003. Fitch's previous ratings incorporated margin improvement in F2004. The flat margins resulted from weak profits at Bombardier Transportation (BT), which Fitch had previously considered to be the more stable of BBD's two remaining industrial segments. The downgrade also reflects expectations for only modest improvement in margins and free cash flow in F2005. In addition, Fitch believes the realization of BBD's inherent profit potential will take longer than previously expected due to the length of time needed to execute necessary restructuring actions.

The negative developments in F2004 were partially offset by several positive factors, including free cash flow which was better than previously anticipated, better than expected performance in the Aerospace (BA) division, and an improved liquidity profile.

The Stable Outlook reflects the level of BBD's credit statistics compared to those of other companies at the 'BBB-' level, the potential for BBD to improve credit statistics with only modest cost reductions, the improved liquidity position, and the completion of the company's recapitalization, which included approximately C$2 billion of proceeds from equity and divestitures. The Outlook also reflects more clarity for near-term regional jet (RJ) deliveries and the apparent stabilization in the business jet market, although at low production rates.

The ratings are supported by significant progress on BBD's multi-year restructuring plan, leading market positions, the more conservative strategy and declining risks at BC, the large backlog at BT, new senior management, and the cost cutting actions at both BA and BT.

Rating concerns include recent financial performance at BT, continued low operating margins and free cash flow, the potential need for further restructuring actions, the uncertain timing of margin improvement, the impact of exchange rate fluctuations on financial results and planning, and the sizable pension deficit. Fitch also has several concerns related to the RJ operation, including the declining backlog and its potential impact on longer-term RJ production rates, the potential maturity of the RJ business, 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 deteriorating financial condition at US Airways.

BBD's F2004 margins did not show much improvement compared to F2003, and they were below what Fitch had been expecting. The main cause of the weak margins was the poor financial performance at BT, which reported EBT margins before special items of 1.1% in F2004 compared to 3.3% in F2003. BT's results included about C$200 million of non-recurring, non-cash contract adjustments. However, even if these adjustments were excluded, margins would have been only 3.3%, flat versus F2003. Aerospace margins improved in F2004 to 2.3% compared to (0.3%) in F2003.

Based on preliminary financial results and accounting for BC using the equity method, BBD's liquidity position at Jan. 31, 2004, was approximately C$3.7 billion, consisting of C$2.1 billion of bank line availability and C$1.6 billion of cash. BBD (excluding BC) has no long-term debt maturities in F2005, but it will likely repay some of BC's advances, which totaled C$776 million at the end of F2004. BBD's short-term credit facilities (worth about C$1.5B) come up for renewal again in F2005 (in July and September). With net debt to capital of 29.4% at year-end, BBD was well below the 50% covenant level in its credit facilities.

As expected, free cash flow was substantially negative in F2004 (C$1 billion), but it was better by several hundred million dollars than the amount incorporated into Fitch's previous ratings. BBD's negative free cash flow resulted primarily from the one-time impact of some of BC's former operations (factoring and used business aircraft financing) migrating to BBD's balance sheet, which at the same time freed up liquidity at BC. Fitch expects BBD's free cash flow in F2005 to be restrained by the costs of BT's restructuring plan and discretionary pension contributions.

Fitch estimates that BBD's credit statistics excluding BC were flat in F2004. Leverage (Debt to EBITDA) for F2004 was 2.8 times (x) versus 2.7x for F2003. Fitch estimates that leverage adjusted to include operating leases and securitizations was flat at 3.8x. Interest coverage was also level at 5.0x. The debt numbers used in these calculations include the C$776 million of advances from BC. Some of the advances from BC are loaned to BBD on a subordinated basis (C$597 million), and the subordinated advances are not included in the covenant calculations for BBD's credit facilities.

BBD announced today a major restructuring plan for BT that addresses the issues of low margins and capacity underutilization (less than 50%). Fitch is encouraged that BBD has been able to put together this plan in the difficult European labor market. Fitch considers the plan to be an investment BBD needs to make in order to realize BT's profit potential. BT will close seven facilities and reduce headcount by more than 15%, as well as taking other actions such as significantly lowering SG&A. Concerns about the plan include the timeline (three years or more) and the cost. The actions will cost approximately C$780 million, and approximately three-quarters of the cost will consist of cash expenditures, much of it for severance pay, spread over about three years.

BC's assets declined nearly C$3 billion in F2004, partly due to exchange rates and the shift of some operations to BBD's balance sheet. BC's on-balance sheet leverage (debt to equity) fell to 3.7x from 6.5x. BC was a source of liquidity to BBD in F2004, as evidenced by the advances made to BBD. BBD will likely repay these advances in F2005 so that BC will have cash to meet nearly US$500 million of debt maturities. Fitch believes that BC will continue to be a source of liquidity in the future, although to a lesser extent than in F2004 as portfolio liquidations slow.