Friday, August 21, 2015

Bombardier Bondholders Suffer as Jet Delays Burn Through Cash

Bombardier Inc. bondholders are feeling the pain from the company’s accelerating cash consumption.

The cost to protect Bombardier bonds from default more than doubled since June 30, soaring the most among members of Canada’s benchmark Standard & Poor’s/TSX Composite Index. Investor unease also is showing up in prices for the 7.5 percent notes due in 2025: Five months after being issued, they’re yielding 13.4 percent.

Blame Bombardier’s history of unwelcome surprises with tardy planes. The company burned through almost twice as much cash in the second quarter as it did in the same period a year earlier, signaling that it’s still struggling with delays on its new CSeries, its largest-ever jetliner. It also postponed its Global 7000 long-range business jet for two years, triggering a trio of credit-rating cuts.

“They’re burning cash and it’s a problem,” said Jack Flaherty, a fund manager in New York at GAM USA Inc., which manages about $17 billion. “The market has been correct in treating it the way they have, widening the spread and showing concern. The fundamentals weren’t there.”

Flaherty said his firm sold its Bombardier bonds about five months ago, following “a further delay in the CSeries,” after holding them for around three years.

Stock Tumbles

The developments add to the strain on Montreal-based Bombardier, whose stock has tumbled to an almost 25-year low amid more than two years of cost overruns and sales struggles for the CSeries, the suspension of the Learjet 85 program and the cutback in output of the Global 5000 and 6000 corporate aircraft. They also heighten the need for the company to proceed with a planned initial public offering of its train unit by the end of 2015.

Chief Executive Officer Alain Bellemare, who took over in February with a mandate to restore profitability, isn’t wasting time. After hiring new executives and raising about $3 billion in debt and equity, the new CEO introduced a “transformation plan” aimed at reducing costs and increasing cash generation through such means as improved coordination with suppliers and better control of working capital.

Bellemare didn’t provide financial details of the plan when he discussed quarterly results on a July 30 call with analysts.

Bombardier had $3.1 billion of cash and cash equivalents and about $9 billion of long-term debt as of June 30. The company doesn’t have material maturities before 2018, when $1.4 billion of debt will mature.

Credit Cuts

Fitch Ratings on Aug. 13 became the third U.S. bond-grading company this month to cut Bombardier’s junk credit, citing its expectation that cash flow will remain “significantly negative” through 2017.

Bombardier used $808 million of free cash flow in the second quarter, almost double the $424 million used in the same period a year ago, it said July 30. At $1.6 billion, Bombardier’s first-half cash usage exceeds the five-year average of $1.2 billion, Bloomberg data show. S&P expects Bombardier to generate negative free cash flow through 2017, analyst Jamie Koutsoukis wrote in a report published Aug. 12.

That trend may put the company’s goal of holding at least $2 billion in cash at risk, according to Joel Levington, a Bloomberg Intelligence analyst in New York. Moody’s estimates the cash balance may fall to $2 billion by September 2016, according to an Aug. 6 report.

‘Perfect Storm’

The cost to protect Bombardier’s debt from default within five years jumped to an equivalent of 1,309 basis points on Wednesday, according to data provider CMA, which is owned by McGraw Hill Financial and compiles prices quoted by dealers in the privately negotiated market. That’s the highest on record.

“It’s a perfect storm,” Evan Mann, a credit analyst at Gimme Credit Publications Inc., said by telephone from Livingston, New Jersey. “They have liquidity to 2016 but if cash burn doesn’t improve nicely, it’s possible they’ll need to raise debt in 2017. Now that they have the downgrade the cost of borrowing goes up so it all feeds on itself.”

When factoring in expected cash flows and various initiatives such as the planned rail IPO, Bombardier will be able to develop new products and meet financial requirements “for the foreseeable future,” the company wrote July 30 in a quarterly filing.

Bombardier isn’t commenting beyond what executives said on the July 30 conference call, said Isabelle Rondeau, a spokeswoman.

The planned rail IPO may take place in the fourth quarter, Bellemare said on the call. The listing will probably be in Germany, where the Bombardier Transportation unit is based.

‘High Risk’

Following through with the train unit IPO may generate proceeds of $1 billion or more, Fitch analyst Eric Ause said in an Aug. 13 report. The transaction “would help liquidity but would not address free cash-flow concerns,” he said.

That gloom probably would lessen if Bombardier can get the CSeries into service by its latest target, 2016, amid development costs ballooning more than $2 billion to $5.4 billion. While Bellemare said July 30 he sees “renewed interest” as flight tests progress, the 243 firm purchases still trail the goal of 300 by the CSeries’ scheduled commercial debut.

Gimme Credit’s Mann said this week the time line has a “high risk” of slipping, which would add to doubts about an aircraft with an 11-month firm order drought.

“People need to see more new orders for the CSeries,” Jens Houe Thomsen, a credit analyst at Jyske Bank A/S, who advises investors to sell Bombardier bonds, said by telephone from Silkeborg, Denmark. “There’s a big chunk of development costs on that program. Getting new customers will be key.”


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