Bombardier Inc. Downgraded To 'CCC+' On Weaker Economy, Likely Unsustainable Capital Structure; Outlook Negative

  • In the weaker macroeconomic environment we anticipate, in large part because of the COVID-19 outbreak, Bombardier Inc.'s capital structure appears to be unsustainable in the long term.
  • As a result, S&P Global Ratings lowered its ratings on Bombardier by one notch, including its issuer credit rating on the company to 'CCC+' from 'B-'.
  • At present, we don't believe Bombardier will face a near-term liquidity crisis given the ample cash on its balance sheet at the beginning of the year.
  • The negative outlook reflects the possibility of another downgrade if macroeconomic conditions further deteriorate from our expectations leading to our view that Bombardier is likely to consider a distressed exchange offer or sub-par redemption in the near term.
TORONTO (S&P Global Ratings) March 24, 2020--S&P Global Ratings today took the rating actions listed above. We expect the weaker macroeconomic environment and COVID-19-related disruptions will result in weaker earnings and free cash flow generation than previously assumed. The downgrade primarily reflects our view that weaker macroeconomic conditions and operating disruptions in the wake of the COVID-19 outbreak are likely to result in credit measures that are weaker than we previously expected. In our Feb. 19, 2020, research update on Bombardier, we were expecting S&P Global Ratings' adjusted debt-to-EBITDA of 6x-7x in 2021. However, we now believe leverage is likely to be higher given our view that earnings and free cash flow prospects for the company's business jet division have deteriorated, at least over the next couple of years. While we recognize that large cabin business jets, which will make up the majority of Bombardier's sales in future will see less downward pressure than small cabin jets, we expect demand will be lower than previously expected. Given Bombardier's high debt load and our expectation for lower earnings and free cash flow generation, we Bombardier's financial commitments appear unsustainable in the long term. We acknowledge that our forecast is highly uncertain at this time and the company has yet to provide updated guidance.
The negative outlook reflects our view that Bombardier could pursue a distressed exchange or other debt restructuring in the next 12 months to reduce its debt obligations, which we consider unsustainable in the long-term. In our view, key risks include weaker-than-expected demand from a global recession, and operating disruptions that could lead to a meaningful free cash flow deficit.
We could lower our rating on Bombardier if the company announces a distressed exchange or we consider such an event to be highly likely. This could occur if macroeconomic conditions further deteriorate from our expectations, contributing to a weaker outlook for business jet demand, and a large free cash flow deficit. It could also occur if we believe the acquisition of the company's Bombardier Transportation (BT) segment by Alstom S.A. is unlikely to close as proposed.
We could revise the outlook to stable if we see a lower likelihood that Bombardier could pursue a distressed exchange or debt restructuring in the next twelve months. This could be the case if we expect a strong recovery in the second half of this year, leading us to believe that Bombardier's capital structure is sustainable in the long-term.
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