MOODY'S CONTINUES ITS REVIEW FOR POSSIBLE DOWNGRADE OF BOMBARDIER'S DEBT RATINGS (SENIOR AT Baa3)
Moody's Investors Service is continuing its review for possible downgrade of the Baa3 long-term and Prime-3 short-term debt ratings of Bombardier Inc. (BI) and its supported finance subsidiaries following the company's announcement of actions taken including 1) that it has obtained a covenant amendment to its two main syndicated bank credit facilities; 2) that it will be issuing at least C$800 million of equity; 3) that it will launch an asset sale program which could yield proceeds in excess of C$1.5 billion, that will include the sale of its recreational products business; 4) that the scope of Bombardier Capital's (BC) business will be reduced and it will focus on only two portfolio categories; 6) that it has adopted new accounting policies to enhance transparency. These changes in accounting policy, together with significant revisions of estimates, resulted in cumulative non-cash pre-tax write-downs of C$2.2 billion. Although the rating agency stated that it views these actions favorably, its ongoing review for possible downgrade will focus on:
1)- The expectation for the current year's cash flows as well as the specific elements impacting it, such as the new restrictions on BC for factoring, green aircraft financing and trade-in and commercial aircraft financing, as well as BI's normal business requirements. The review will also assess the company's ability to materially improve its long-term cash flow generation and to more effectively manage its working capital requirements; especially at a time when traditional cash advance terms for aircraft orders are more difficult to secure.
2)- The timing of and actual proceeds realized from the equity issuance and asset sales. Moody's noted that significant proceeds will be needed in the near-term in order to bolster the company's balance sheet and liquidity profile. Moody's noted that the company is in the midst of its fiscal first half, when BI normally experiences significantly negative cash flows; while on consolidated basis, the company's scheduled debt repayments and maturities of bank facilities are significant.
3)- BI's ability to obtain sufficient third-party financing to replace financing that was provided by BC for its businesses.
4)- Its progress in winding down BC's discontinued portfolios in terms of the size of the reduction of receivables, timing, and realizing prudent valuations compared to book values;
5)- The impact of the geopolitical conditions on future orders and deliveries of aircraft as well its current exposure to aircraft financing
Moody's will consider that near-term cash flow generation may be materially negative due to the significant initiatives that the new management is undertaking, in addition to the normal seasonal cash flow requirements. The rating agency stated that if its review concludes that the company may not be successful in improving its liquidity profile, balance sheet and cash flow generation on a sustainable basis, the ratings may be downgraded. However, a successful and timely implementation of these initiatives along with a material improvement in the company's long-term cash flow potential could result in an affirmation of the current ratings.
Ratings remaining under review for possible downgrade 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 Coordination Center S.A. -- the Prime-3 short-term debt rating, guaranteed by BI.
Bombardier Inc., headquartered in Montreal, Quebec, is a diversified company involved primarily in the aerospace, transportation, motorized consumer products, and financial services markets.
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