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Rating Action:

MOODY'S DOWNGRADES THE SENIOR UNSECURED RATINGS OF BOMBARDIER INC. AND BOMBARDIER CAPITAL INC. TO Ba2 FROM Baa3; ASSIGNS SGL-2 SPECULATIVE GRADE LIQUIDITY RATING

11 Nov 2004
MOODY'S DOWNGRADES THE SENIOR UNSECURED RATINGS OF BOMBARDIER INC. AND BOMBARDIER CAPITAL INC. TO Ba2 FROM Baa3; ASSIGNS SGL-2 SPECULATIVE GRADE LIQUIDITY RATING

Approximately $6 Billion of Debt Securities Affected.

New York, November 11, 2004 -- Moody's Investors Service downgraded the senior unsecured debt ratings of Bombardier Inc. (Bombardier) and its wholly owned captive finance subsidiary, Bombardier Capital Inc. (BC) to Ba2 from Baa3. A SGL-2 Speculative Grade Liquidity Rating and a Senior Implied Ratings were assigned to the company. The rating outlook is negative.

The downgrades reflect Moody's expectation of continued weak levels of cash flow generation relative to indebtedness as a result of ongoing poor operating performance and financial returns in the company's aerospace unit as well as the potential need for further reduction of regional jet production capacity if deferrals or cancellations of regional jet orders were to occur. The downgrades also consider the slow pace of recovery in the company's rail systems unit, and the potential for demands on cash flow due to pension funding requirements and/or a more difficult than anticipated economic and competitive environment in the company's primary markets. Moody's notes that special charges, losses and deficit free cash flow have eroded the company's equity base and balance sheet strength over the past several years, and that the company has responded by restructuring its core businesses, issuing new equity and monetizing assets, including its recreational products division and portions of the receivable portfolio at Bombardier Capital. The rating acknowledges the actions the company has taken to strengthen its liquidity profile, its current substantial balance sheet liquidity and unused lines of credit, the continued orderly liquidation of assets at Bombardier Capital, the return of the transportation unit to profitability and the strength of the business jet and turboprop segments of the company's aerospace segment.

The negative outlook considers the various risks facing each business unit. The segment most subject to uncertainty is aerospace where an economic downturn, a cancellation of orders, or the decision to proceed with the development of a new aircraft model could represent substantial additional stress on the company's financial profile. While the transportation segment has demonstrated improved performance, it will be challenged to improve margins sufficiently to provide adequate returns on the capital invested in the business (including goodwill). This business faces reduced demand in Europe and the need to effectively manage bidding practices to avoid the large contract losses that precipitated previous charges. Bombardier Capital continues to monetize certain receivable portfolios but could see increased loan losses in the event of an economic downturn.

Bombardier has gone through a substantial change in its primary business model in the past three years including the sale of its recreational products business, a rebuilding of its troubled transportation business, a refocus of the activities of Bombardier Capital, and a downsizing of the regional jet portion of its aerospace business. Overall, cash flow to debt metrics, although improved, are not reflective of an investment grade risk profile. Free cash flow to debt at Bombardier Inc. for the last twelve months ended July 2004 was 7% and interest coverage before charges was 0.9 times.

The transportation business seems to be on a slow path to recovery after substantial writedowns. Due to the long cycle nature of this business, Moody's expects that recovery will be accomplished over the next several years. However, Moody's notes that orders have slowed as the company restructures its contracting process. The backlog has declined to $22.1 billion as of June 2004 from $23.7 billion as of the end of January 2004. As a result, although this segment is expected to provide increased positive cash flow to the overall enterprise, the amounts will not be sufficient to, in and of themselves, continue to justify an investment grade rating.

Bombardier's core aerospace businesses benefits from currently strong demand in the business jet segment which is expected to continue for the intermediate term. The turboprop business is expected to continue at its current profitable production rate. It is in the area of commercial regional jets that the company faces, in Moody's opinion, its largest challenges. Production rates have been cut to levels that should be sustainable over the near term but the order book remains heavily dominated by airlines facing severe financial difficulties. Should it be necessary to further reduce production rates, the company will, in Moody's opinion, be required to take an additional charge and could face added cash flow pressures. Bombardier is contemplating the development of a new larger aircraft type (100+ seats) that would require substantial cash investment. While important for Bombardier's long term competitiveness, such an investment could increase risk while further reducing cash flow available for debt service.

The wind-down of the majority of the portfolios at Bombardier Capital continues and, to date, this process has been successful. Moody's expects that, absent a near term economic downturn, this process should continue without undue difficulties. The financial results at Bombardier Capital have been positively impacted by a strong economic environment and any substantial weakening of the overall economy could lead to increased delinquencies and reduced asset valuations.

Moody's notes that the company's bank lines of credit, partly used for letters of credit to support its contracting businesses, contain a covenant limiting net debt to capital to less than 50%. The current net debt to capital is reported to be approximately 40%. Although it is unlikely that this covenant will be tested in the near term, an unexpected reduction in equity from either an asset writedown or a special charge could pose a challenge to the company.

Current liquidity is adequate based on cash balances of $2.2 billion and unused lines of credit of $2.2 billion as of July 2004. However, Moody's notes that to meet its debt obligations Bombardier Capital is dependent on cash held at its parent, Bombardier, Inc. The rating downgrade will trigger several potential calls on cash over the next six months that could amount to as much as $431 million. Moody's considers the current cash balances available to the company to be sufficient to meet such calls as well as scheduled debt maturities over the next twelve months. The SGL-2 rating reflects the support provided by current balance sheet liquidity and the unused portion of the company's line of credit offset by the cash demands created by the ratings trigger, near term debt maturities at Bombardier, Inc. and at Bombardier Capital.

The Ba2 ratings and the negative outlook reflect the current uncertain environment in which the company is operating and incorporates the potential for modest additional negative events in the aerospace segment. The rating also anticipates a slow but steady reduction in uncertainty surrounding the company's core businesses. The rating would be negatively affected if further charges to equity were to test the bank loan covenant and constrain the company's liquidity profile, the company were to sustain negative free cash flow over an extended period of time because of any faltering in the recovery of the transportation segment or because of any further meaningful reductions in regional jet production, and/or the continued runoff of finance assets at Bombardier Capital were to be impaired.

The rating or the outlook would be favorably affected by greater stability in each of the company's primary businesses leading to a sustained increase in profits and return on capital and a ratio of retained cash flow to debt at levels in excess of 20%.

The ratings affected are as follows:

Bombardier Inc.

Issuer rating downgraded to Ba2 from Baa3

Senior unsecured debt downgraded to Ba2 from Baa3

Speculative Grade Liquidity Rating of SGL-2 assigned

Senior Implied Rating of Ba2 assigned

Bombardier Capital Inc.

Senior unsecured debt downgraded to Ba2 from Baa3

Short term rating downgraded to Not Prime from Prime-3

All ratings at Bombardier Capital, Inc. benefit from a support agreement provided by Bombardier Inc.

Bombardier Capital Funding Ltd Partnership

Senior unsecured debt downgraded to Ba2 from Baa3

(Guaranteed by Bombardier Capital Inc.)

Bombardier Coordination Center S.A.

Short-term rating downgraded to Not Prime from Prime-3

(Guaranteed by Bombardier Inc.)

Bombardier Inc., headquartered in Montreal, Quebec, is a diversified company involved primarily in the aerospace, transportation, 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
Richard Bittenbender
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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