Wednesday, February 08, 2017

Canada’s Latest Aid to Bombardier Rekindles Trade Dispute With Brazil: Brazil seeks World Trade Organization consultations, saying Canada’s loan to aircraft maker threatens to distort competition

The Wall Street Journal
Updated February 8, 2017 4:08 p.m. ET

OTTAWA—Brazil on Wednesday opened a fresh trade dispute with Canada, sharply criticizing the Canadian government’s latest round of financial support for struggling aircraft maker Bombardier Inc., a rival of Brazil’s Embraer SA.

Canada’s move to provide a loan of 372.5 million Canadian dollars ($283 million) to Bombardier, announced late Tuesday, rekindles a bitter trade row between the two countries over government support for the aerospace sector that dates back to the late 1990s.

The Brazilian government said the latest government aid to Montreal-based Bombardier, designed to support the development of Bombardier’s CSeries and Global 7000 aircraft, threatens to distort competition in the aerospace sector. Bombardier received the equivalent of US$2.5 billion in government support in 2016 alone, Brazil said, referring to deals with the province of Quebec and the province’s biggest pension fund, Caisse de dépôt et placement du Québec.

Brazil filed a request for consultations with the World Trade Organization in Geneva, alleging Canada isn’t living up to its obligations under global trade rules—the first step in launching a formal complaint with the WTO. If Brazil and Canada fail to resolve the matter in the next 60 days, a WTO-appointed panel will be asked to rule on Brazil’s allegation.

Canadian Trade Minister François-Philippe Champagne defended the latest aid package to Bombardier. “I feel very confident that this is within the WTO rules,” he told reporters in Ottawa, “and if [Brazil] wants to bring a challenge, bring it on.”

Even within Canada, the burgeoning government assistance to Bombardier, which has long been one of the country’s biggest and highest-profile manufacturers, faces some objections. The opposition Conservative Party called the deal a “corporate bailout.” Descendants of company founder Joseph-Armand Bombardier still control the company through supervoting shares, making it a target of corporate-governance activists.

The package from Ottawa followed more than a year of negotiations with the company, during which federal officials insisted publicly that Bombardier would only get funding if it could show a business case for a deal. The package is far short of the $1 billion sought by Bombardier that would have matched what Quebec put up in exchange for a stake of just below 50% in the CSeries project.

Bombardier sought government financing at both the provincial and federal levels to ensure its liquidity after a costly restructuring and billions in write-downs in 2015, largely related to the declining value of its CSeries aircraft, which it started delivering in 2016.

Delays and cost overruns on the CSeries, which was designed to compete in the single-aisle jet market with giants Airbus SE and Boeing Co., and softness in the market for such aircraft strained the company’s cash flow.

The earlier Quebec deals helped to reassure investors and customers that the company is on the path to a sounder financial footing, and the added help from Ottawa this week might alleviate some lingering concerns about the company’s stretched balance sheet, aerospace analysts say.

“The free cash flow impact may not be overly significant,” said Konark Gupta, an analyst with Macquarie Capital Markets Canada in Toronto. “However, every little bit counts when free cash flow is negative,” and $1.45 billion in debt comes due at the end of the decade.

At the end of the third quarter, Bombardier had roughly $8.96 billion in long-term debt and $3.39 billion in cash available. The company said late last year it anticipated using between $750 million to $1 billion of free cash flow to finance activities.

At a news conference late Tuesday in Montreal, Bombardier CEO Alain Bellemare said the loan, available over a four-year period, gives Bombardier much-needed financial flexibility in the event of another market shock and enables it to pursue new projects that could boost earnings. “It’s the right solution for where we are” as a company, he said.

Embraer, which competes directly with Bombardier in the smaller, single-aisle aircraft market, applauded the Brazilian government’s decision to take the matter to the WTO. ”It is essential to restore a level playing field to the commercial aircraft market and ensure that competition is between companies, not governments,” said Paulo Cesar de Souza e Silva, Embraer’s chief executive.

The legal process could take more than two years once appeals have been exhausted, trade lawyers say.

A Bombardier spokesman said the company was confident the loan from Canada would pass muster. “The simple truth is that we have the best product, and we’ll continue to compete and win both in the marketplace and at the WTO.”

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