Post by
Tempo1 on May 20, 2024 8:41am
Moody's rationale for the may 02 upgrade to B1
Toronto, May 02, 2024 -- Moody's Ratings (Moody's) upgraded Bombardier Inc.'s ("Bombardier") corporate family rating (CFR) to B1 from B2, its probability of default rating (PDR) to B1-PD from B2-PD and senior unsecured notes rating to B1 from B2. At the same time LearJet Inc.'s backed senior unsecured revenue bonds issued by the Connecticut Development Authority were upgraded to B1 from B2. The outlook remains stable.
"The upgrade reflects Bombardier's continued progress of reducing its financial leverage, increasing earnings, improving margins and generating free cash flow", said Jamie Koutsoukis, Moody's analyst.
RATINGS RATIONALE
Bombardier continues to post improvements in its margins and earnings, and at the same time reducing its absolute debt level. The company has generated positive free cash flow since 2021, and its adjusted operating margin increased to almost 10% in 2023 compared to about 8% one year ago. Revenue visibility continues to remain strong and unit book to bill was 1x in 2023. Additionally, the company continues to reduce debt, repaying $425 million in 2023 and an additional $100 million year to date 2024 and has been proactive in addressing its debt maturities with no meaningful maturities until mid-2026.
Bombardier benefits from: 1) good liquidity over the next year; 2) significant scale; 3) a strong market position within the business jet market; and 4) a $14.9 billion backlog. Bombardier's rating is constrained by: 1) high fixed charges of about $700 million per year (interest and capital expenditures) that can constrain the company's free cash flow; and 2) its participation in the cyclical business jet market which has a number of strong competitors and a niche consumer base.
Bombardier has good liquidity over the next year (SGL-2), with about $1.7 billion of sources versus about $150 million of uses. Sources are cash of about $1.2 billion at Q1/24, $236 million available on its secured revolving credit facility ($300 million ABL facility that expires in 2027), and about $300 million in free cash flow through to March 2025. Bombardier has no maturities until June 2026. Uses are about Uses are about $150 million of financial liabilities (excluding term debt but including items such as lease liabilities, liabilities related to various divestitures and government refundable advances). Bombardier does have significant inter quarter working capital swings that require the company hold ample liquidity.
The stable outlook reflects Moody's expectation that Bombardier will continue to generate free cash flow and that margins and financial leverage will improve in 2024 and 2025.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if debt to EBITDA is maintained below 4x and the company continues to generate positive free cash flow.
The ratings could be downgraded if Bombardier sees a deterioration in its operating performance or there are problems with its ability to deliver aircraft in line with its guidance. Quantitatively, the rating could also be downgraded if debt to EBITDA is sustained above 5.5x or EBIT to Interest falls below 1.5x.