Fitch Downgrades Bombardier's Sr. Unsecured Notes to 'CCC'/'RR4'; Affirms IDR at 'CCC'

(The following statement was released by the rating agency) Fitch Ratings-Chicago-25 August 2020: Fitch Ratings has downgraded Bombardier Inc.'s (BBD) senior unsecured notes to 'CCC'/'RR4' from 'CCC+'/'RR3' and removed the notes from Rating Watch Negative. Fitch has affirmed BBD's Issuer Default Rating (IDR) at 'CCC' and preferred shares at 'CC'/'RR6'. The downgrade of BBD's senior unsecured notes follows the closing of BBD's three-year secured term loan of up to $1 billion. The loan is secured by certain aviation inventory and related accounts receivable. The senior position of the term loan compared to unsecured notes results in lower recoveries estimated by Fitch for the unsecured notes in a distress scenario. The term loan will provide additional liquidity while BBD completes pending asset sales of its aerostructures and Bombardier Transportation (BT) businesses and addresses the impact of the coronavirus pandemic on demand for business jets. It also increases BBD's financial flexibility over the medium term following the asset sales as there is currently no credit facility available to the aviation business. Bombardier Inc.; Long Term Issuer Default Rating; Affirmed; CCC ----preferred; Long Term Rating; Affirmed; CC ----senior unsecured; Long Term Rating; Downgrade; CCC Key Rating Drivers BBD's ratings incorporate the company's high leverage, negative FCF, Fitch's concerns about the risk of constrained liquidity over the long term if FCF does not become positive after 2020, and substantially smaller scale after completing pending asset sales. BBD intends to use proceeds from asset sales to pay down debt, but Fitch believes the loss of earnings from divested businesses will offset much of the effects of lower debt and leave leverage at elevated levels. After mid-2021, BBD will be focused on the business jet market where it is well positioned. However, the business jet market is highly cyclical and is experiencing significant disruption due to the coronavirus pandemic although activity has increased from trough levels earlier this year. Negative FCF: The impact of the coronavirus pandemic exacerbated BBD's seasonally weak FCF in the first half of 2020, which totaled approximately negative $2.7 billion. FCF in the second quarter was less negative than originally anticipated, but Fitch expects that FCF could approach negative $3 billion for all of 2020. Cash from pending asset sales in 2020 and 2021 will help to offset negative FCF during the period. However, Fitch expects liquidity, before considering short-term borrowing, might be inadequate for short periods depending on the timing of cash flows. This concern is mitigated by the new $1 billion term loan. Asset Sales: Proceeds from asset sales offset concerns about liquidity in the near term. Transactions include $575 million from the Canadair Regional Jet (CRJ) program that was completed June 1, 2020 and approximately $500 million from BBD's aerostructures business, which is expected to be completed in the fall of 2020. The sale of Bombardier Transportation to Alstom (PA:ALSO) SA is expected to occur in the first half of 2021, which would provide net proceeds of approximately $4.2 billion-$4.5 billion. Fitch believes there is a risk that the valuation could be adjusted prior to closing, potentially resulting in lower proceeds than currently anticipated. Liquidity Concerns: Proceeds from asset dispositions will support debt reduction but, in the absence of a return to positive FCF, Fitch believes BBD could be challenged to meet funding needs by late 2022 or in 2023. In addition to scheduled debt maturities, BBD has pension liabilities and certain retained liabilities related to the sale of the regional jet program. High Leverage: Fitch expects BBD's leverage could remain high in the absence of a solid economic recovery, even after expected debt reduction. BBD's closest debt maturities include EUR414 million due in May 2021 and USD1.018 billion due in December 2021. There are additional debt maturities in 2022. At June 30, 2020, debt/EBITDA was well above 10x, as calculated by Fitch. Weak Operating Results: Low orders at BBD's Aviation and Transportation businesses and previous temporary production shutdowns associated with the coronavirus are contributing to sharp declines in revenue and to lower margins expected for all of 2020. Fitch expects the revenue impact on BBD to be mitigated by the backlog for the Global 7500. Margins likely will be negatively affected by new safety measures implemented to protect employee health, and planning will be more difficult until economic conditions stabilize. Fitch assumes demand will start to recover in the second half of 2020, but the pace of improvement is difficult to estimate, and a return to higher margins may be slow. The Transportation business has a large backlog, and government support for Transportation customers is possible. However, a resumption of normal activity may not occur before the anticipated divestiture of the business in 2021. Derivation Summary BBD's current operating profile includes well-established positions in its aerospace and transportation markets. There is significant competition in these markets and several competitors are larger, better capitalized or generate higher margins, putting BBD at a disadvantage with respect to funding future new programs in business jets and supporting working capital at BT. Alstom's agreement to acquire BT is consistent with expected consolidation in the rail equipment sector. When the transaction is concluded, BBD will be less diversified and have a more concentrated exposure to the cyclical business jet market. BBD generates lower revenue and margins than Gulfstream, a subsidiary of General Dynamics Corporation (NYSE:GD), although margins should benefit over the long term from an updated product line and BBD's increased focus on business jets and aftermarket revenue. BBD's credit profile is weaker than its peers due to significant previous investment in developing the A220, which contributed to high leverage. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer --FCF in 2020 is significantly negative and could approach negative $3 billion; --BBD completes pending divestitures in 2020 and the first half of 2021; --Liquidity is adequate to fund scheduled debt maturities at least into 2022; --Business jet revenue declines significantly in 2020 due to the impact of the coronavirus pandemic, including the effect of a trough in business jet activity early in the year followed by some improvement; --Aviation margins are low in 2020 followed by gradual improvement due to a refreshed product line, a focus on aftermarket revenue, and cost efficiencies associated with higher production of the Global 7500; --Margins at BT continue to be pressured by legacy projects. Recovery Analysis --The analysis for BBD reflects Fitch's expectation that the enterprise value of the company, and recovery rates for creditors, would be maximized as a going concern rather than through liquidation. Fitch has assumed a 10% administrative claim. The recovery analysis assumes that a combination of lower end market demand, negative FCF partly offset by proceeds from the sale of Aviation assets in 2020, and an inability to refinance debt creates a distress scenario in 2021 or 2022. --Going-concern EBITDA of $349 million reflects Fitch's projected EBITDA in 2022 for BBD's business jet operations following asset sales of other aviation businesses in 2020 and the sale of BT in 2021. EBITDA reflects challenging conditions associated with the coronavirus pandemic that are contributing to weak margins and cash flow as well as uncertainty about the timing of a full recovery in BBD's business jet market. --An EBITDA multiple of 6.0x is used to calculate a post-reorganization valuation, below the 6.7x median for the industrial and manufacturing sector and above the 5.5x average for the small subset of A&D companies. The multiple incorporates a competitive environment and cyclicality and event risk in the aerospace sector. --In a distress scenario, Fitch assumes BT is divested in 2021 as planned. Fitch uses a discounted value of $3.4 billion, which incorporates execution risk related to the pending sale of BT. Fitch assumes all liabilities at BT remain with BT as it is relatively independent of BBD's aviation business. --Fitch assumes $500 million of the secured term loan is outstanding after the sale of BT to Alstom is concluded. Under this scenario, the recovery model produces a Recovery Rating of 'RR4' for unsecured debt, reflecting average recovery prospects (31%-50%) in a distress scenario. The 'RR6' for preferred stock reflects poor recovery prospects due to a low priority position relative to BBD's debt. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: --The impact of the coronavirus pandemic is resolved without a significant long-term impact to the business jet market; --Annual FCF is positive; --Consistently lower leverage, including debt/EBITDA below 6.0x. Factors that could, individually or collectively, lead to negative rating action/downgrade: --FFO interest coverage is below 1x; --Pending sales of the BT and Aerostructures assets are not completed as planned, or the company receives less cash than originally expected; --Cash plus availability under BT's revolver is less than $1 billion. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure BBD's liquidity at June 30, 2020 included cash of $1.7 billion plus $738 million of availability under BT's EUR1.154 billion revolver that matures in 2022. BT has access to a EUR75 million uncommitted short-term revolver and has a letter of credit (LC) facility used to support performance risk and secure advance payments from customers. In addition, BT has arrangements under which it receives amounts from third-party advance providers in exchange for rights to customer payments, and sells certain receivables on a non-recourse basis. BT and the Aviation business both make use of extended payment terms although payment terms on new Aviation trade payables are not currently being extended due to financial market conditions. As of June 30, 2020, covenants in BT's bank facilities included minimum liquidity, minimum equity, and a maximum debt/EBITDA ratio, all calculated for BT on a stand-alone basis. Minimum required liquidity at the end of each quarter varies between EUR500 million and EUR750 million. BBD does not publicly disclose required levels for other covenants. Amendments to the revolver and letter of credit facility were made in the second quarter of 2020, including adjustments to certain financial covenants. Financial covenants were all met as of June 30, 2020. BBD's reported long-term debt totaled $9.3 billion at June 30, 2020 including the current portion. Scheduled maturities include approximately $1.5 billion due in 2021 (EUR414 million in May; USD1.018 billion in December) and $1.7 billion due in 2022. BBD's debt at June 30, 2020 as calculated by Fitch totaled approximately $11.8 billion. In addition to long-term debt, this amount includes borrowings under BT's revolver of $564 million and approximately $1.8 billion related to contract balances and receivables sold under BT's arrangements described above, together with amounts sold under extended payment terms. Fitch also includes half of BBD's preferred shares. BBD's net pension obligation at Dec. 31, 2019 was nearly $2 billion (79% funded) including unfunded plans. Funded plans were 86% funded. BBD will retain slightly more than half of pension and other post-retirement liabilities after BT is sold. ESG CONSIDERATIONS The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. Contacts: Primary Rating Analyst Eric Ause, CFA Senior Director +1 312 606 2302 Fitch Ratings, Inc. One North Wacker Drive Chicago 60606 Secondary Rating Analyst Brad Jarman, Associate Director +1 416 644 1179 Committee Chairperson Craig Fraser, Managing Director +1 212 908 0310 Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria Corporate Hybrids Treatment and Notching Criteria (pub. 11 Nov 2019) (https://www.fitchratings.com/site/re/10100477) Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10120170) Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10090792) Sector Navigators - Addendum to the Corporate Rating Criteria (pub. 26 Jun 2020) (https://www.fitchratings.com/site/re/10125796) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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