Fitch Upgrades Bombardier's Rtgs to 'BB+'; Outlook Stable.
--IDR to 'BB+' from 'BB';
--Senior unsecured debt to 'BB+' from 'BB';
--Preferred stock to 'BB-' from 'B+'.
The Rating Outlook is Stable. The ratings affect approximately $4.7 billion of outstanding debt and preferred stock as of Jan. 31, 2008.
The upgrades to BBD's ratings reflect improved credit metrics, the company's progress in realizing higher margins and cash flow, and a solid outlook for many of its end-markets. The ratings are also supported by a large backlog, the company's business diversification, its leading market positions, the robust business jet market, and its healthy liquidity position. The company's ratings were previously upgraded one notch in January 2008 when it used high cash balances to reduce debt by approximately $1 billion. BBD is focused on building a stronger capital structure and further reducing leverage, which would help reduce its cost of funds and improve the company's financial and strategic flexibility.
Although Fitch anticipates that BBD could further strengthen its financial profile over the long term, the Stable Outlook incorporates shorter term operating challenges that the company continues to address. These include margins that, while improving, remain relatively low by industry standards, particularly in the business jet and regional aircraft businesses. In fiscal 2008 aerospace margins increased to 5.8% compared to 3.9% in fiscal 2007. As a result of an accounting change, the aerospace business may attain BBD's margin target of 8% as early as fiscal 2009, but the company could reset its target to reflect the accounting change and its outlook for the business. In the transportation business, margins in fiscal 2008 before special charges increased to 4.4%, up from 3.9% in fiscal 2007. The increase includes the benefits of a previously completed restructuring program which have been partially offset by special charges and a reduction in scope related to BBD's participation in the Metronet project. Fitch believes BBD should be able to complete the rest of the project at a reasonable level of profitability, but the recent program adjustments represent a delay in BBD's long-term plans to grow margins to 6% and expand its presence and capabilities in signaling and services work in the transportation sector.
Other rating concerns include business jet market cyclicality and the impact of exchange rate volatility on margins, financial results, and planning. Aerospace concerns include risks inherent in developing new aircraft models, new entrants in the regional jet (RJ) market, and contingent obligations related to past aircraft sales, although these contingent obligations are spread out over time and are not a near-term concern. Tighter conditions in the credit markets could potentially prompt BBD to provide aircraft financing, at least on an interim basis, that could increase its funding needs and make it more difficult to achieve better credit metrics.
BBD continues to hold significant market shares in its aerospace and transportation markets. During fiscal 2008 BBD's total orders increased significantly due to growing international demand for business jets and a rebound in demand for larger regional aircraft. Aerospace unit orders were 698 aircraft in fiscal 2008 compared to 363 aircraft in fiscal 2007, bringing the aerospace backlog to $22.7 billion. Orders in the transportation segment were comparatively stable at $11.3 billion after increasing in fiscal 2007 to $11.8 billion due to large orders for rolling stock. Transportation's backlog rose to $30.9 billion. Bombardier's total backlog at the end of fiscal 2008 was $53.6 billion, up from $40.7 billion.
After meeting with the management of the CSeries program, Fitch has become more positive on the business case for the program, although risks are still present. Fitch's concerns regarding the program include execution of the development and certification plan (which is a common concern for all new aircraft programs), the potential need for BBD to finance some deliveries, the supply chain, market demand, and potential competitor responses. Fitch's previous concerns about the CSeries' source of technological advantage have been reduced by BBD's disciplined approach to designing the plane, which has increased the likelihood that the CSeries will produce the expected fuel efficiency, noise reduction and reduced emissions. The technology supporting these benefits includes the new geared turbofan engine from Pratt & Whitney and an increased use of advanced materials (composites and an aluminum-lithium alloy). The interior is also attractive, incorporating many features which are similar to those found in the Boeing 777 and 787. Potential competition from Boeing, Airbus and RJ manufacturers represents a significant concern, including pricing actions on existing aircraft from Boeing and Airbus.
In February 2008, BBD's board of directors authorized CSeries sales offers to customers. BBD has not announced any launch orders, but if sufficient orders are received, BBD could launch the CSeries by the end of 2008, with entry into service expected in 2013. The CSeries would serve as BBD's entry into the mainline aircraft market, targeting the low end of the 100-149 seat range (110-130 seats). Expenditures for development and tooling are estimated at approximately $3.2 billion, with BBD picking up about one-third of the cost and suppliers and governments picking up the rest. Fitch estimates that BBD should be able to fund the program with internally generated cash or cash balances. In addition to lower operating costs, an important foundation of BBD's business case for the CSeries is the argument that the aircraft will be the only plane in the market specifically designed for the 100-149-seat segment, with all other aircraft in the segment scaled up or down from other models.
Free cash flow rose substantially in fiscal 2008 to $1.9 billion. The receipt of customer advances in fiscal 2008 generated an unusually large amount of cash from working capital. While a similar cash inflow is not expected to recur, free cash flow should be supported by BBD's large backlog, especially in the aerospace segment. Cash deployment is primarily directed toward capital expenditures that include the development of new aircraft such as the CSeries. Expenditures are expected to be spread out over several years, so the impact of the development programs on BBD's financial position should be manageable.
BBD's credit protection measures at the end of fiscal 2008 continued to improve as debt/EBITDA declined to 3.24 times (x) compared to 4.74x one year earlier. Stronger free cash flow measures were largely attributed to the impact of working capital as described above. Although FFO Interest Coverage declined to 2.54x in fiscal 2008 from 3.47x in fiscal 2007, it included the impact of a large, $826 million pension contribution. Going forward, the ratio should benefit from a lower pension contribution in fiscal 2009, estimated by BBD at $315 million, as well as BBD's $1 billion debt reduction debt completed at the end of fiscal 2008.
At Jan. 31, 2008, BBD maintained $3.6 billion of unrestricted cash balances, not including $1.3 billion of restricted cash related to its letter of credit (LOC) facility. Restricted cash balances are not available for liquidity purposes or for the benefit of unsecured bond holders. Bombardier's unrestricted cash balances are the company's sole source of liquidity as it does not have a bank facility available; the LOC facility is restricted to LOC issuance. BBD's liquidity position benefits from a reduction in net pension liability following significant contributions in 2008. In addition, debt maturities are minimal until fiscal 2013.
|Printer friendly Cite/link Email Feedback|
|Date:||May 16, 2008|
|Previous Article:||Timberline Knolls Supports Illinois House Bill 1432 to Provide Fair and Equal Coverage for Eating Disorders.|
|Next Article:||Mocana Wins 2008 Red Herring 100 Award.|