Moody's : the rating expanations. Note from Lb1: It desserve a reading; well explained, short, acurate, a frank picture.
Toronto, April 28, 2021 -- Moody's Investors Service, ("Moody's") upgraded Bombardier Inc.'s ("Bombardier") senior unsecured notes to Caa2. As part of the same action, Moody's affirmed Bombardier's Caa2 Corporate Family rating, and Caa2-PD Probability of Default rating . The Speculative Grade Liquidity Rating ("SGL") is unchanged at SGL-3, indicating adequate liquidity and the outlook remains negative.
"Bombardier's senior unsecured notes ratings have been upgraded in line with CFR because of the removal of priority claims following the sale of their transportation segment" said Jamie Koutsoukis, Moody's analyst.
RATINGS RATIONALE
Following Bombardier's sale of its Transportation business to Alstom, the $1.5 billion in Bombardier Transportation convertible preferred shares held by the Caisse de dpt et placement du Qubec ("CDPQ") are no longer part of the company's capital structure, removing the priority claim relative to Bombardier's unsecured debt. The sale provided net proceeds to Bombardier of approximately $3.6 billion, including about $600 million in shares of Alstom.
Bombardier is constrained by 1) high cash flow consumption in 2021 (estimated at around $600 million) which will reduce Bombardier's currently adequate liquidity, 2) untenable leverage even after debt paydown from the transportation unit sale debt proceeds of $3.6 billion (not meaningful at Q4/2020 and an estimated 20x in 2021) , 3) large debt maturities from October 2022 through 2025 that have high refinancing risk.
Bombardier benefits from 1) adequate liquidity over the next year, 2) significant scale, and a good market position in its remaining business jet segment, and 3) a nearly $11 billion backlog.
Bombardier has adequate liquidity over the next year (SGL-3), with about $5.4 billion of committed available liquidity sources versus Moody's estimate of about $3.7 billion in uses. Sources are cash of $1.8 billion at year end 2020 (excluding cash that was held at Bombardier Transportation) and the $3.6 billion of proceeds received from the sale of its transportation unit to Alstom (including $600 million of Alstom shares, with a short lockup period) that closed in January 2021.
Uses include Moody's expectation of $600 million of free cash flow usage through 2021, $2.4 billion already used or committed to debt reduction (repayment of $750 million senior secured credit facility in February 2021, and $1.5 billion with its March tender offer) and maturities of an additional $750 million in the next twelve months. The maturities consist of EUR414 million ($510 million) due in May 2021, $60 million due December 2021 (net of tender offer payment), and $180 million due March 2022 (net of tender offer payment). Bombardier doesn't have access to a revolving credit facility.
The negative outlook reflects Bombardier's continued cash consumption, and though it has been able to address its near term maturities, there is uncertainty regarding its ability to refinance or reduce debt for its sizable maturities beginning in October 2022 ($4.7 billion due 10/22 through 03/25).
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded if there is increased default risk including distressed exchanges or inability to refinance its debt.
Factors that could lead to an upgrade include less debt with adjusted financial leverage below 8x (not meaningful LTM Q4/20) and sustainable free cash flow generation.
Bombardier has a dual class share structure by where the founding family has 50.9% of the voting rights through a special class of stock carrying 10 votes a share. The same group also has four of the company's 14 board seats, despite owning just 12.2% of the equity. Bombardier's management also has a track record of not meeting its provided guidance.