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Rating Action:

MOODY'S DOWNGRADES SENIOR DEBT RATINGS OF BOMBARDIER, INC. AND FINANCE SUBSIDIARIES TO Baa2 FROM A3; ALL RATINGS ARE UNDER REVIEW FOR POSSIBLE DOWNGRADE.

17 Jan 2003
MOODY'S DOWNGRADES SENIOR DEBT RATINGS OF BOMBARDIER, INC. AND FINANCE SUBSIDIARIES TO Baa2 FROM A3; ALL RATINGS ARE UNDER REVIEW FOR POSSIBLE DOWNGRADE.

Approximately $3.6 Billion of Debt Securities Affected.

New York, January 17, 2003 -- Moody's Investors Service downgraded the long-term debt ratings of Bombardier Inc. (BI) and its supported finance subsidiaries to Baa2 from A3. The long term ratings, along with the company's Prime-2 ratings for commercial paper, remain under review for possible downgrade. The rating action considers the significant challenges facing Bombardier in adjusting its business to the weaker market for its business aircraft products and improving the performance of its finance subsidiary, Bombardier Capital Group (BC), while reducing the group's overall financial indebtedness. Moody's acknowledges the initiatives the company has taken to curtail business aircraft production and reduce inventories, as well as to exit certain business lines of BC and monetize certain portfolios at BC. The Baa2 rating reflects Moody's assessment of Bombardier's credit quality assuming the company achieves the cash flow targets it has established for the fiscal year ending January 31, 2003. The continuing review will assess the outlook for the company's industrial businesses in the coming year, the company's ability to better anticipate working capital needs and overall debt levels, the ongoing progress in winding down BC portfolios, and its ability to maintain an adequate liquidity profile. The review will also consider the implications of any potential changes in Bombardier's business and financial strategies under its new CEO.

Ratings downgraded and remaining under review for possible downgrade are:

Bombardier Inc. -- its issuer rating to Baa2 from A3; and its senior debt rating to Baa2 from A3.

Bombardier Capital Inc. -- the senior debt rating to Baa2 from A3; and the rating for its MTN program to Baa2 from A3; both ratings supported by BI.

Bombardier Capital Funding Ltd Partnership -- the senior debt rating, guaranteed by Bombardier Capital Inc, to Baa2 from A3.

Ratings placed under review for possible downgrade are:

Bombardier Capital Inc. -- the Prime-2 short-term debt rating, supported by BI.

Bombardier Coordination Center S.A. -- the Prime-2 short-term debt rating, guaranteed by BI.

Over the last several years, Bombardier has greatly expanded its position in the aerospace market, with significant investments in developing and producing business jets used by corporations and individuals, and regional jets used by commercial carriers. However, the declining economic environment has reduced demand primarily for the company's business jets and resulted in greater than historical levels of cash consumption. Bombardier has initiated actions to dramatically reduce aircraft production, including interruptions in production lines in Toronto and Wichita as well as a significant workforce reduction. These initiatives should allow the company to reduce inventory levels and better match production to current demand. Moody's believes that Bombardier retains a sound business position in the aerospace market, but that the operating and cash flow performance of this segment will remain under pressure at least through 2003.

Bombardier also operates other industrial businesses such as the transportation and recreational products units. These businesses provide important diversification of earnings and cash flow during the current weak environment in the aerospace industry. Transportation, which develops, manufactures and services rail transport systems has experienced healthy growth in its sales, profits and backlog as a result of last year's acquisition of Adtranz and strong demand for its products. This segment historically has been a strong cash flow generator due to customary cash advances. However, the segment's profitability remains low; although actions have been taken to improve it.

Bombardier's recreational products segment is a major producer of snowmobiles, watercraft, boats, all-terrain vehicles (ATVs), utility vehicles and engines. After a period of poor performance, this unit has recorded healthier sales and profitability for the last three years due to an ongoing rationalization initiative, acquisitions, and new product introductions. This segment, however, is subject to economic cycles and consumer spending patterns, and any further weakness in consumer sentiment could adversely affect its performance.

Bombardier has indicated that scheduled deliveries of aircraft, along with continued earnings from its other businesses should enable it to generate free cash flow from its industrial segments of C$2.3 billion during its fiscal fourth quarter ending January 31, 2003. This would facilitate a reduction of currently elevated debt levels and lessen the company's reliance on short term funding. Bombardier's businesses have historically evidenced significant seasonal working requirements during the first three quarters and large free cash flow generation during the fourth quarter. The Baa2 rating anticipates that normal working capital reduction will allow the company to reduce short term debt, and that the company will effectively manage future working capital requirements in light of a weaker business environment. Any material shortfall in near term cash generation or further erosion of business performance could adversely affect the rating.

Bombardier Capital, the company's captive finance business, has provided financing to Bombardier's customers as well as certain lines of third party product financing. Despite rapid growth over the last several years, BC has achieved only modest financial returns while significantly increasing the Bombardier Group's overall reliance on the debt markets. Moody's views favorably, the company's actions to curtail BC's scope of activities, including the decision in September 2001 to withdraw from financing manufactured housing, and the September 2002 decision to pursue the sale and gradual wind-down of the receivable factoring and business aircraft finance portfolios. Portfolio quality has benefited from the withdrawal from the manufactured housing sector, and the initial steps to exit the factoring and aircraft finance portfolios have facilitated a meaningful reduction in BC's reliance on short-term debt. However, successful completion of BC's plan to reduce indebtedness by C$5.0 billion from the July 31, 2002 levels will require the sale of business aircraft related portfolios, which could represent a significant challenge in the current business environment. Moreover, Moody's believes that the adequacy of financial returns at BC will remain a concern, particularly if the significant portfolio downsizing were to reduce operating leverage.

At October 31, 2002 Bombardier had consolidated short term debt of about C$4.8 billion, of which about C$2.2 billion was at the BC level. In addition to cash of about C$1.5 billion the group maintains committed bank facilities of C$11 billion under which about C$3 billion was available after considering direct drawings, LC usage and CP backup. While the company has remained in compliance with financial covenants, about C$1.9 billion of long-term debt and C$2.8 billion of these facilities mature during the company's FY2004. Successful liquidation of the discontinued portfolios of BC together with planned working capital reductions at BI and the establishment of limited recourse facilities to undertake future financing of business jets and receivable factoring activities should permit the group to reduce its reliance on the commercial paper and bank credit markets. Nevertheless, given the highly seasonal nature of BI's cash flows and the difficult capital markets for any of BC's financing activities, Bombardier's ability to maintain an adequate liquidity profile will require it to maintain significant bank credit lines.

The Baa2 rating assumes that Bombardier will achieve the near-term free cash flow targets it has articulated and that it will meaningfully reduce indebtedness at the BI and BC levels over the coming year. Bombardier has not yet provided formal guidance for its FY 2004 which will be subject to developing conditions in the aerospace market and the business and financial strategies to be implemented under Paul Tellier, the company's new CEO. Moody's ongoing review will assess the outlook for the company's business units, its ability to better manage working capital needs and overall debt levels, and the ongoing progress in winding down BC's portfolios. The review will also assess the future direction of the group under new leadership and the company's financial risk tolerance, including its ability to maintain an adequate alternate liquidity profile. While adverse developments could negatively affect the rating, any further near-term rating action is currently expected to be modest, reflecting the company's strong business franchise and liquidity profile.

Bombardier Inc., headquartered in Montreal, Quebec, is a diversified company involved primarily in the aerospace, transportation, motorized consumer products, and financial services markets.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Tassos Philippakos
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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