Analysts adopt bleaker mood on Bombardier debt

 - January 15, 2008, 6:28 AM

Corporate analysts are carefully monitoring the possible implications of any new or modified Bombardier business and financial strategies under new CEO Paul Tellier, who took over from Robert Brown in mid-January. He assumed office last month just as Moody’s Investors Service downgraded long-term debt ratings of Bombardier Inc., Bombardier Capital (BC) and Bombardier Capital Funding.

The downgrading was driven by “significant challenges” that face the manufacturer in adjusting to a weaker business-aircraft market and in improving finance-subsidiary performance while simultaneously reducing debts. New York-based Moody’s has also placed under review short-term debt ratings of BC and Bombardier Coordination Center.

The investor service initially announced a review three months ago, citing “the weak business-jet market and potential for pressures on [Bombardier’s] currently healthy regional-jet (RJ) business [because] of deteriorating performance of U.S. airlines, which [represent] a large part of its RJ backlog.” The continuing review is assessing the outlook for Bombardier’s industrial businesses, and its ability to improve anticipation of working-capital needs and overall debt levels, and to maintain an adequate liquidity profile.

Also being considered is progress in reducing BC portfolios and the implications of any potential changes in business and financial strategy that Tellier might introduce. The company’s aerospace interests have grown rapidly since Bombardier first entered the aerospace industry in 1986 with the acquisition of Canadair in Montreal. It subsequently bought Toronto-based de Havilland Aircraft of Canada, U.S. manufacturer Learjet and Northern Ireland’s Short Brothers.

Moody’s said reduced demand for business jets has resulted in “greater than historical levels” of cash consumption, but it believes that significant job cuts and production interruptions in Canada and the U.S. would both cut inventory levels and better match market requirements. Nevertheless, “Bombardier retains a sound business position in the aerospace market, but operating and cash-flow performance will remain under pressure at least through 2003.”

On the finance front, Moody’s said BC has achieved “only modest returns while significantly increasing [Bombardier’s] overall reliance on debt markets.” It favorably views Bombardier’s decision to gradually wind down the business-aircraft finance portfolio, but warns that success in reducing debt by C$5 billion ($3.25 billion) from July 2002 levels requires the sale of the portfolio, “which could present a significant challenge.”

The Canadian transport conglomerate has started 2003 in the face of a slow market for new business jets and an uncertain demand for regional airliners, many of which are operated by carriers that are owned or controlled by major airlines still suffering a prolonged recession.