BBD.PR.B, BBD.PR.C & BBD.PR.D Downgraded to P-5(high) by S&P

Bombardier announced a ‘pause’ today and the market paused its bids:

Bombardier Inc. (BBD/B) tumbled the most in at least 26 years after moving to cut about 1,000 jobs and book $1.4 billion in pretax fourth-quarter costs as it halts work on the Learjet 85 business aircraft.

The dismissals will take place in Kansas and Mexico, and result in severance expense of $25 million this quarter, said Bombardier, which didn’t predict when the Learjet 85 program will resume. Profit in the aerospace and trainmaking units for 2014 will fall short of previously announced targets.

Bombardier’s pullback on the Learjet 85, which was described as a “pause” in the face of weak demand, underscored the company’s struggle in developing new planes. The Learjet 85 is already more than a year behind schedule, and Montreal-based Bombardier eliminated about 3,500 aerospace jobs last year as it postponed the CSeries airliner for the fourth time.

“It’s really not clear to me what ‘pause’ means,” said Cam Doerksen, an analyst at National Bank of Canada Financial in Montreal who rates Bombardier as sector perform. “This is a pretty sizable charge, and this suggests to me this may be longer than a typical delay. This appears to be an indefinite pause.”

The cost to protect Bombardier’s debt from default within 5 years jumped 125 basis points to 481 basis points at 4:17 p.m., according to data provider CMA, which is owned by McGraw Hill Financial and compiles prices quoted by dealers in the privately negotiated market. The contracts are at the highest level since January 2012.

and S&P cut their credit rating by a notch:

  • •Montreal-based Bombardier Inc. announced it would pause its Learjet 85 program due to weak demand and has revised its business aircraft market forecast downward.
  • •In addition, the company revised its 2014 guidance, including reduced earnings before interest and taxes margins at both the aerospace and
    transportation divisions.

  • •Because of Bombardier’s reduced profitability, pricing pressures on new aircraft, and revised escalation assumptions in the transportation division on some contracts that affected estimated future revenues, we
    have reassessed our comparable rating modifier on the company and revised it to “neutral” from “positive”.

  • •As a result, we are lowering our ratings on Bombardier, including our long-term corporate credit rating to ‘B+’ from ‘BB-‘
  • •The negative outlook reflects our view that Bombardier’s 2015 performance could remain challenged due to market conditions and the company’s continued large capital spend program, leading to weaker credit protection measures than previously forecast.

The ratings on Bombardier reflect what we view as the company’s “satisfactory” business risk profile and “highly leveraged” financial risk profile. Our ratings take into consideration the company’s leading market positions in the transportation and business aircraft segments, as well as its product range and diversity. These positive factors are partially offset, in our opinion, by the continued execution risk associated with the entry into service of the CSeries jet, high leverage, and reported profitability that has been weak in both the aerospace and transportation divisions.

The negative outlook reflects our view that Bombardier’s 2015 performance could remain challenged due to market conditions and the company’s continued large capital spend program, leading to weaker credit protection measures than we previously forecast. Furthermore, the outlook incorporates our opinion that, given Bombardier’s current leverage and debt-to-cash flow metrics, there remains very limited room for delays on project execution or margin

We could lower the rating on Bombardier should its new aircraft program experience further delays or order levels do not allow for profitable production, resulting in a reassessment of the company’s business risk profile. In addition, we could take a negative rating action should Bombardier face liquidity pressures, which could result from either deteriorating headroom under its covenants or an inability to refinance upcoming maturities.

These issues have previously been downgraded to P-4(low) by S&P in February 2014 and to Pfd-4(low) by DBRS. All are tracked by HIMIPref™ and all are relegated to the Scraps index on credit concerns.

Update, 2015-1-26: Moody’s has placed Bombardier under Review-Negative:

Moody’s Investors Service placed Bombardier Inc.’s Ba3 Corporate Family rating (CFR), Ba3-PD probability of default rating and Ba3 senior unsecured ratings under review for possible downgrade. Moody’s also lowered the company’s speculative grade liquidity rating to SGL-3 from SGL-2.

The rating’s review follows Bombardier’s announcement yesterday that it has materially lowered its earnings and cash flow expectations for 2014. Consequently, Moody’s believes Bombardier will need to raise additional debt to fund the cash shortfall and address its weakened liquidity position, which would further pressure the company’s adjusted leverage from an already high level of approximately 7x currently. As well, given ongoing execution challenges in its Transportation division, relatively weak order flow for certain of its aircraft, and the potential for further cost escalation related to its CSeries aircraft program, Moody’s believes the company will continue to consume cash through at least 2015. Bombardier’s $2.4 billion of cash and $1.4 billion of available revolvers provides adequate liquidity, however continued covenant compliance through the next year is a concern in Moody’s opinion.

Moody’s review will focus on Bombardier’s plans to strengthen its liquidity position, as well as the company’s prospects for improving its earnings and reducing its cash consumptiveness through 2016.

Bombardier’s unsecured notes, which do not benefit from upstream guarantees, could be lowered by more than the CFR, particularly if the company obtains secured debt with any funding initiatives.

10 Responses to “BBD.PR.B, BBD.PR.C & BBD.PR.D Downgraded to P-5(high) by S&P”

  1. fed says:

    Thanks for your blog. I just discovered it and have read a great deal.

    I am wondering why BBD.PR.C has been tumbling so low. It seems to be on free fall at this point, yet the yield is continually rising. I believe it is at 11% now.

    Thanks for your information. It is greatly appreciated.

  2. jiHymas says:

    Bombardier has been a weak credit for quite a while, and last week it got even worse:

    Bombardier’s stock hit a new 22-year low on Friday amid reports that its new Global 7000-8000 business jet may be delayed and initial concerns that a major Chinese airline turned to Boeing instead of the Montreal-based company’s CSeries.

    The shares hit a low of $1.84 in early trading but were down 2.5 per cent, or five cents, to $1.95 in later trading on the Toronto Stock Exchange.

    That followed a more than 10 per cent dip on Thursday.

    The last time Bombardier’s shares plunged so low was in 1993.

    Thursday’s selloff followed a Bloomberg report that cited a company official who said the Global program was under “a full review,” including the schedule for deliveries.

    … and layoffs on the production line didn’t help:

    Corporate jets have traditionally been Bombardier’s most profitable division. Earnings before financing expense, financing income and taxes at the unit will probably amount to 7 percent of revenue this year, the company said in February.

    Bombardier announced plans in May to cut about 1,750 jobs at the business aircraft unit due to a slowdown in production of the Global 5000 and 6000 models.

    Aviation International News first reported the Global 7000 and 8000 program review late Wednesday.

    So, yeah, at today’s closing bid of 14.00, BBD.PR.C yields about 11.25% … but it’s only yield if you actually get the money, and that is a more uncertain prospect than it used to be. You should bear in mind that if worst comes to worst and the company goes bankrupt, you’ll probably get nothing. If worst comes to second-worst, preferred shareholders will get some scraps of ‘new common’ in a reorganization, similarly to the way the Yellow Media disaster played out.

  3. fed says:

    Are you saying that if you buy the preferred shares you are betting that the company won’t go bankrupt? No other influence?

  4. jiHymas says:

    Essentially, yes, but I have the feeling this is some kind of trick question.

    The yield is so far above that which can be achieved through investment in investment-grade issues that if you are sure the company won’t go bankrupt (or otherwise wipe out your entitlement to the dividend stream by, for instance, a plan of arrangement, or even simply suspending dividends), then why wouldn’t you buy it?

  5. fed says:

    No trick. I’m just starting out in preferreds, and it seems rather confusing. They all seem quite low now, and I was wondering if that was a major factor here, or if it was mostly the financials, which have been known for some time now.

    Enbridge is down a fair bit as well, and they are doing just fine, I believe.

  6. jiHymas says:

    I was wondering if that was a major factor here, or if it was mostly the financials

    I don’t understand what you mean by the reference to financials.

    Enbridge is down a fair bit as well, and they are doing just fine, I believe.

    Enbridge has credit problems of its own. While not nearly so serious as the problem Bombardier has, a downgrade to Pfd-3(high) status by DBRS is so widely anticipated that they’re trading at that level already.

  7. fed says:

    And GWL.PR.N? It is Pfd-1(Low), but is trading quite low. Is it low because it has a low yield (3.65% at $25, that is) and is resetting soon at 1.3% above Government of Canada Bond Yield? Which today would mean 1.28% + 1.3% = 2.58%?

    Please correct me, but if bought at the current price of $16.1, the yield is currently 5.6% and will likely reset at 4%. It can then reset in 5 years at a higher rate if the GCAN5YR is up at that point.

    Am I understanding this all correctly? If not, please explain. If so, I think I am beginning to get this stuff. Confusing, but quite interesting.

  8. jiHymas says:

    I assume you mean GWO.PR.N, a 3.65%+130 FixedReset that was announced 2010-11-15 and commenced trading 2010-11-23 and was poorly received.

    Five year Canadas closed today at 0.70%. I’m not sure where you get your 1.28% number from.

    So the currently projected reset (to take effect 2015-12-31) is (0.70% + 1.30%) * 25 = 2.00% * 25 = $0.50 p.a., which will (if it comes to pass) give rise to a Current Yield of 3.13% at today’s bid of 15.99 (if the bid remains constant until then).

    However, Current Yield is deprecated. Use the Yield Calculator for FixedResets to calculate yields.

    Also, GWO.PR.N is issued by an Insurance Holding Company and is not NVCC-compliant (none of the insurance issues are) which means that I ASSUME that redemption at par will happen on or before 2025-1-31 (this date may change, or disappear completely, as OSFI’s intentions regarding insurance company regulation become more clear. Naturally, this “Deemed Retraction” or “Deemed Maturity” has a large effect on calculated yield. The market does not agree with my assumption; you can take your choice.

    I immodestly and greedily suggest you purchase a copy of PrefLetter which discusses all this stuff in greater detail.

  9. fed says:

    Yes, I do mean GWO. Sorry.

    Thanks for the comment on the poor reception of the issue. I guess the reset was the issue. A lot of them seem to reset at that level, however.

    Thank you for correcting the 5y Canadas. Now I know where to find it.

    Thanks for the yield calculator. It makes no sense to me at all right now, but I’ll put in the effort to figure it out.

    I also can’t figure out the NVCC issues. I’ve looked the, up, but again, it is beyond me. Any idea where I should start to figure that out?

    Thanks again for your help. I will look at the PrefLetter.

  10. jiHymas says:

    Thanks for the yield calculator. It makes no sense to me at all right now

    See What Is The Yield Of HSE.PR.A? for an example.

    Any idea where I should start to figure that out? … I will look at the PrefLetter.

    You’re doing fine!

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