S&P: Bombardier Inc. Downgraded To 'B-' From 'B', Business Risk Profile To Weak From Fair
At the same time, S&P Global Ratings lowered its issue-level rating on the company's senior unsecured debt to 'B-' from 'B'. The recovery rating on the debt is unchanged at '4', indicating our expectation for average (30%-50%; lower half of the range) recovery in the event of a default.
S&P Global Ratings also lowered its global scale and Canada scale ratings on the company's preferred stock to 'CCC-' and 'P-5'(Low) from 'CCC' and 'P-5', respectively.
"The downgrade primarily reflects our view of the company's increased sensitivity to protracted weakness in its end markets and future delays to its C-Series program," said S&P Global Ratings credit analyst Aniki Saha-Yannopoulos.
We expect relatively soft overall demand in the company's business and commercial jet segments to limit improvement in cash flow generation over the next two to three years. In addition, we continue to estimate the company will generate large free cash flow deficits over this period--notably related to its C-program. We acknowledge Bombardier's sizable liquidity position, which provides flexibility to fund its significant capital expenditures compared to cash flow over the next few years. However, we believe the company remains exposed to weaker-than-expected market conditions in its key end market, or further delays in its C-Series program that could precipitate higher than expected cash flow deficits and limit its financial flexibility. Furthermore, we view a material improvement in the company's highly leveraged credit measures, which are potentially unsustainable over the longer term, as unlikely at least through 2018.
Bombardier announced that it will cut the delivery of its C-Series in 2016 to seven from 15 due to delays in jet engine deliveries by its supplier Pratt & Whitney. At the same time, the overall business jet industry and commercial jet segment in which Bombardier operates remains under pressure; the company has announced an additional US$150 million cash flow deficit due to the C-Series delay. We continue to forecast weak EBIT and negative FFO through 2017, including a high cash flow deficit, due to the ramp-up of the C-Series and delays in 2016 deliveries.
The ratings on Bombardier reflect what we view as the company's weak business risk profile and highly leveraged financial risk profile. Our ratings take into consideration the company's competitive market position in the transportation and business aircraft segments, as well as Bombardier's product diversity. These positives are offset, in part we believe, by the continued risk associated with Bombardier's production ramp-up of the C-Series jet, high leverage, weakness in the business jet space, and declining cash flow from both the aerospace and transportation divisions.
The stable outlook reflects our view that even though the company faces multiple risks, it has ample liquidity resources to manage its operations. Taking into account the weakness in the company's business jet end markets, adjusted delivery schedule for the C-Series, and Bombardier's bringing the C-Series into production, we expect the company to face a US$1.65 billion-US$2.0 billion cash flow shortfall through 2017 (of which US$1.2 billion was spent in the first half of 2016), which could be higher if it fails to meet its operational targets or faces additional unexpected delays. We believe the company's current liquidity is sufficient for the company to meet its cash requirements through 2017.
We might take a negative rating action if Bombardier's liquidity weakens more than expected, due to either significant operating under performance or weakness in the various end markets. We may also review the ratings if we view the company's capital structure as unsustainable with limited financial flexibility.
We would consider raising the ratings if Bombardier generates positive FFO leading to adjusted FFO-to-Debt in the low-to-mid single digits. This would be contingent on Bombardier being able to place the C-Series into service, effectively removing the execution and cost risk associated with the program, combined with sustained improving margins and free cash flow. We view any positive rating action as unlikely in the next 12 months due to the reduced revenues and negative free cash flow forecast under our base case.