MOODY'S CONFIRMS THE DEBT RATINGS FOR BOMBARDIER INC AND ITS FINANCE SUBSIDIARIES (SENIOR AT Baa3, SHORT-TERM AT PRIME-3); RATING OUTLOOK IS NEGATIVE
Approximately $6 billion of Debt Securities Affected
New York, July 29, 2003 -- Moody's Investors Service confirmed the Baa3 long-term debt ratings
of Bombardier Inc. (BI), as well as the Baa3 long-term
and Prime-3 short-term debt ratings of its finance subsidiaries.
The outlook is negative.
Moody's stated that the confirmation reflects management's progress
in implementing extensive restructuring plans aimed at improving the total
enterprise's liquidity and financial profile. The rating agency
noted that Bombardier successfully issued C$1.2 billion
of equity, executed the sale of non-core assets, and
cut its dividend in half. In addition, Bombardier Capital's
(BC) heavy debt load has been reduced through the use of proceeds from
the sale of certain BI non-core businesses and the sale/wind down
of BC assets, progress has been made in the company's efforts to
sell the recreational products segment, and BI renegotiated its
364-day portion of its syndicated European bank facility,
which will now mature in July 2004.
Moody's added that the confirmation also incorporates the new management's
actions to improve the cost structure of its core businesses through cost
cutting, focus on improving efficiencies and Six Sigma initiatives;
although the rating agency also stated that further operating and cash
flow improvements are still necessary. Furthermore, the confirmation
considered management's determination to further strengthen the company's
financial condition through the anticipated sale of the recreational products
segment, and a continuing focus on liquidity. Moody's further
recognizes the company's intention to reduce the scope of BC and to refocus
BC's portfolio through further winding down and/or through outright sales
Bombardier's rating outlook is negative, reflecting the company's
need to continue to execute on its financial plan over the near term.
Moody's stated that the company needs to materially strengthen its free
cash flow generation over the next six months and lay the foundation for
sustainable improvements in the future, and to execute the sale
of the recreational products segment. The rating agency also said
that it will continue to monitor Bombardier's free cash flow generation
as compared to its financial plan. If the company shows improvement
over the near term, assuming the sale of recreational products occurs,
the rating outlook could be moved to stable.
Since new management took over, serious steps have been taken to
improve the company's weakened performance and financial condition,
which occurred as a result of the extremely weak environment in the aerospace
sector, increasing debt levels due to acquisition activity,
higher capital expenditures, and growth in working capital and aircraft
financing, and weak performance within certain asset classes of
the BC portfolio. These factors resulted in liquidity pressures,
as the company's access to the public market became problematic,
just when it was faced with significant debt maturities.
Over the last several months, Bombardier has made significant progress
in its plans to improve the company's liquidity position and total enterprise
balance sheet through the execution of several key initiatives within
its extensive restructuring plan. During fiscal first quarter ending
April 2003, the company generated about C$2.4 billion
of cash primarily from an equity issuance and the wind-down and
sale of assets at BC. These funds more than offset the huge one-time
spike in working capital use during the first quarter, which occurred
as a result of management's decision for BC to discontinue receivable
factoring for BI's businesses and the financing of Bombardier's business
jets. As a result, the company was able to reduce debt by
about C$142 million during the quarter.
The company also sold two small none-core businesses, and
made progress in the sale of the recreational products segment.
Moody's noted that when the recreational products segment is finally sold,
additional material debt reduction will occur, especially when coupled
with the further sale and wind-down of assets at BC.
Through cost-cutting efforts and the application of Six Sigma,
management is also determined to strengthen the company's profitability
over time (for example, through the doubling of operating margins
within the transportation segment from its historical average of about
3 percent). In addition, management is expected to continue
focusing on strengthening cash flow generation through improvements in
asset management, while focusing on sustainable financial health.
Furthermore, the company has stated that BC will only focus on interim
aircraft financing and inventory finance. To contain its exposure
in aircraft financing, the company has decided to cap its exposure
to aircraft financing at US$1.0 billion or 60 aircraft.
In addition, the Canadian government, in continuing with its
export-financing strategy, recently announced that it is
prepared to provide about C$1.2 billion in new loans (as
a lender of last resort) to Bombardier customers in order to help export
sales of regional jets.
Moody's, however, noted that the company will continue facing
several intermediate-term challenges, including the following:
1 - continuing depressed demand for business jets;
2 - persistent weak airline traffic, and the poor financial
condition of the airline industry;
3 - the need to materially improve the company's profitability
from historically low levels;
4 - sizable cash contributions related to its underfunded pension
plan, which, at the end of FY2003, was underfunded by
about C$2.7 billion;
5 - the need to complete the sale of the recreational products
segment in the near-term;
Ratings confirmed with negative outlook are:
Bombardier Inc. -- its Baa3 issuer rating; and
its Baa3 senior debt rating.
Bombardier Capital Inc. -- the Baa3 senior debt rating;
the Baa3 rating for its MTN program; and the Prime-3 short-term
debt rating (all ratings are supported by BI).
Bombardier Capital Funding Ltd Partnership -- the Baa3 senior
debt rating, guaranteed by Bombardier Capital Inc.
Bombardier Inc., headquartered in Montreal, Quebec,
is a diversified company involved primarily in the aerospace, transportation,
motorized consumer products, and financial services markets.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service