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
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
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
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