DBRS downgrades Bombardier on weaker results, cash burn in aerospace division

MONTREAL – DBRS has downgraded Bombardier’s issuer rating one notch to BB (low) with a stable trend after the transportation giant last week reported weaker third-quarter results.

The rating service said the actions mainly reflect concerns that the heavy use of cash by Bombardier’s aerospace division to develop aircraft like the CSeries will continue longer than originally expected.

DBRS had placed the Montreal-based company’s ratings under review in August due to the large use of free cash flow associated with the CSeries, along with high debt and weaker earnings.

“The company’s recent quarterly announcement highlighted soft aerospace market conditions at Bombardier Aerospace, as well as new contract execution issues at the Bombardier Transportation division,” DBRS said in a news release.

The CSeries had its maiden flight Sept. 16, but DBRS said high ongoing capital expenditure requirements and nearly nine months of flight testing delays have elevated the program’s costs, which the company says are US$3.4 billion.

Consequently it used nearly $2 billion free cash year-to-date compared with $1.3 billion in fiscal 2012. The Company issued US$2 billion in debt in January 2013 to cover the funding shortfall.

DBRS said any extension in the “highly aggressive” 12-month flight test program could be costly in terms of missed revenue opportunities from customers.

Bombardier has 177 firm orders for the CSeries and expects to have 300 orders by the time the first aircraft is delivered in about a year. However, it hasn’t received any significant orders since the Ilyushin Finance Co. placed a firm order of 32 CS300s in June. Indonesia’s Lion Air Group says it negotiating the purchase of about 50 aircraft.

“In the near mid-term, the high capital expenditures, volatile aerospace market, delayed CSeries deliveries and general profitability issues have further postponed the anticipated recovery in Bombardier’s financial profile until sometime beginning in 2015,” the rating agency said.

Bombardier has about $4 billion in liquidity, which DBRS said will likely cover negative free cash flow over the next year. But DBRS said it “would not be unexpected for Bombardier to address its capital needs or to improve liquidity via further debt issuances, especially during the seasonally demanding quarters.”

Bombardier said its net profit decreased 14.5 per cent to US$147 million in the quarter on a 3.6 decrease in revenues to US$4.06 billion.

Aerospace revenues for the period ended Sept. 30 decreased 12 per cent to US$2 billion, while railway revenues were up six per cent to US$2.06 billion.

On the Toronto Stock Exchange, Bombardier’s shares were up five cents at C$4.67 in afternoon trading Friday.