It’s possible that I shall make an ass of myself. But in that case one can always get out of it with a little dialectic. I have, of course, so worded my proposition as to be right either way (K.Marx, Letter to F.Engels on the Indian Mutiny)
Saturday, January 18, 2020
Bombardier's future in question after debt-reduction options being considered
BYE BYE NOT BUY BUY BOMBARDIER
BANKRUPT AGAIN
TO BE BAILED OUT BY QUEBEC INC. AND THE CANADIAN STATE?
THIS WILL IMPACT WORKERS IN THREE COUNTRIES ON THREE DIFFERENT CONTINENTS CANADA, UK, EU (IRELAND)
The future of Bombardier Inc. is being called into question after the company said it was actively considering alternatives to reduce its staggering debt.
After exiting the commercial aircraft business, selling its aerostructures unit and unloading a large tract of land in Toronto, the company said it is working to reduce debt and "solve its capital structure." Bombardier's long-term debt stood at more than US$9 billion as of Dec. 31, 2018.
"We are actively pursuing alternatives that would allow us to accelerate our debt paydown. The objective is to position the business for long-term success with greater operating and financial flexibility," it said in a news release Thursday that warned about weaker financial results for 2019.
What that means is unclear, says Walter Spracklin of RBC Capital Markets.
"What exactly this strategic alternative is constitutes the key 'wild card' in the Bombardier stock," he wrote in a report, decreasing his target price by a third to $2.
"The stock reaction reflects the ever-mounting liquidity concerns, with many investors we talked to doubtful as to whether there is a solution."
The company's language suggests some urgency that can't be resolved by just pushing out debt maturities, added Seth Seifman of JP Morgan.
"This suggests to us the potential to pursue strategic options, including a breakup and sale of all or part of the company," he wrote. "It may include one or both of Bombardier's two major businesses: bizjets and trains."
Cameron Doerksen of National Bank Financial says aviation would be the most likely candidate for sale since transportation is a better stand-alone business.
"Our math shows that if Bombardier did sell its aviation segment and used the proceeds to de-lever and reacquire the Caisse de depot's stake in Transportation, based on where pure-play rail equipment OEMs trade today, Bombardier shares could be worth $3.87," he wrote. The pension fund manager holds a 30 per cent stake in Bombardier Transportation.
The Caisse declined to indicate if it is interested in purchasing more of the transportation unit, saying only that it supports "the continuing work of Bombardier Transportation's management team to improve the subsidiary's operating performance — including the actions taken to address certain legacy projects."
Bombardier's shares plunged 31.8 per cent to their lowest level in nearly four years following its release, which pointed to a possible withdrawal from a partnership with Airbus in the commercial aircraft previously called the C Series. The stock closed down 57 cents to $1.22 in heavy trading of 60.2 million shares on the Toronto Stock Exchange.
The financial miss is mainly due to actions taken to resolve challenging rail projects, the timing of milestone payments and new orders and the delivery of four business jets slipping into the first quarter of 2020, the company said.
It said it is reassessing its ongoing participation in the Airbus partnership about two years after giving up a controlling stake in the program to Europe-based Airbus SE.
Airbus owns 50.06 per cent of the joint venture, Bombardier 33.58 per cent and Quebec 16.36 per cent after injecting US$1 billion in 2016.
While the A220 program is gaining orders as it proves its value, additional cash will be required to support the ramp-up of production, a delay in reaching break-even and lower returns over the life of the program, it said in a preliminary announcement of its fourth-quarter and 2019 results set to be released Feb. 13.
"This may significantly impact the joint venture value," Bombardier said, adding it will disclose any writedown next month.
Bombardier said it expects consolidated revenue for 2019 to total about US$15.8 billion and consolidated adjusted earnings before interest, taxes, depreciation and amortization of about US$830 million.
The company, which reports in U.S. dollars, had said in October it expected revenue between $16.5 billion and $17 billion for the year and adjusted earnings before interest, taxes, depreciation and amortization between $1.2 billion and $1.3 billion.
The company said it expects to earn zero adjusted EBITDA in the fourth quarter on about $4.2 billion in revenues with losses in transportation offset by earnings in aviation.
Consolidated free cash flow is expected to be around $1 billion in the fourth quarter, about $650 million lower than anticipated. However, the shortfall is expected to be recovered in 2020.
A total of 58 aircraft were delivered in the fourth quarter and 175 for the full year, including 11 Global 7500s.
Industry analysts called the financial warning negative with some cutting their price target for Bombardier's shares.
"The key question is how much closer is the company to solving these issues, and what comfort can we get that new issues of similar scope and magnitude will not recur," added Spracklin.
The operational issues of transportation and update on the A220 are disappointing, said Benoit Poirier of Desjardins Securities.
"Nevertheless, we note that the value of the A220 program is not currently reflected in Bombardier's stock and therefore management's decision to review its strategic options for the program should unlock value through deleveraging — even at a depressed valuation," he wrote.
This report by The Canadian Press was first published Jan. 16, 2020.
Bombardier has warned investors that it may exit its joint venture with Airbus to produce the A220 airliner (formerly the C Series).
Airbus has delivered 105 aircraft out of 600 total orders since taking over the A220 program. Frederick K. Larkin Photo
In a preliminary fourth-quarter earnings report, the Canadian OEM said it’s anticipating a US$130 million loss for the period, which may force it to sell off assets in order to pay down debt – one of which is its stake in the commercial aviation venture.
In the report, Bombardier remarked that while the A220 program “continues to win in the marketplace and demonstrate its value to airlines,” the Airbus Canada Limited Partnership (ACLP) – the name of its joint program with Airbus – had made the call for additional cash investments to support production ramp-up, in turn extending the timeline for the program to break even and potentially generating a lower profit-margin over the life of the partnership.
“With its exit from commercial aerospace, Bombardier is reassessing its ongoing participation in ACLP,” the company said in the statement.
The partnership began in 2017, when Airbus announced it would be acquiring a 50.01 per cent stake in Bombardier’s C Series commercial airline program, while Bombardier retained a 31 per cent stake and Investissement Quebec got the remaining 19 per cent. After the sale, Airbus changed the name of the aircraft to the A220, and opened up a second production facility in Mobile, Ala.
Originally, Bombardier agreed to fund up to $925 million to the A220 program over a three-and-a-half year span. Airbus Photo
In the original deal, Bombardier agreed to fund the program with up to $925 million over a three-and-a-half-year span. Since Airbus’s acquisition of the program, the company has delivered 105 aircraft out of 600 total orders.
Now, Bombardier is contemplating extricating itself from the program entirely, even though it’s invested $6 billion into the A220 venture, in a effort to shed further costs – an announcement that sunk the company’s stock by nearly 32 per cent on the Toronto Stock Exchange Jan. 16. As a result, Moody’s Investors Services — an American credit rating agency — changed Bombardier’s rating outlook from stable to negative.
Even more surprisingly, the statement is coming at the same time as Air Canada celebrates the entry into service of its first A220-300.
All of this comes after a four-year stretch that saw the Canadian OEM sell off most of its aviation assets in a turnaround plan aimed at leveling off costs, leaving the company with only its rail and business aviation divisions.
In its preliminary fourth-quarter financial report, the company also said it will be providing additional information when it reports its 2019 financial results on Feb. 13. Bombardier back to the brink after rethinking Airbus A220 deal
Siddharth Philip and Paula Sambo, Bloomberg News
Bombardier Inc.’s deal with Airbus SE to rescue its long-delayed and over-budget jetliner program was supposed to be a lifeline for the struggling manufacturer. Now the Canadian company is rethinking the joint venture, pushing the iconic train and plane maker to the brink once more.
The shares posted their biggest loss ever -- Bombardier is almost a penny stock again -- and bonds tumbled after the company said it was reassessing the A220 jet program with Airbus. Costs for the new plane are rising, and the goal of breaking even may come later than expected, likely prompting a writedown when Bombardier reports earnings next month.
“The joke continues,” said John O’Connell, chief executive officer of Toronto-based Davis Rea Ltd. “This company has been a disaster my whole career and I’m almost ready to retire.”
The possible retreat from the A220 program, formerly known as the C Series, could be another blow to Bombardier’s efforts to increase cash flow to help pay down its US$10 billion debt load. The company has already sold assets in recent years to tackle its debt, including pending deal for its CRJ jet unit with Mitsubishi Heavy Industries Ltd.
The C Series was originally pitched as a major breakthrough for Bombardier, providing a plane that was bigger than its traditional jets yet generally smaller than Airbus’s workhorse A320-family jets and Boeing Co.’s 737 planes. Yet program delays and cost overruns sent the investment soaring to US$6 billion, raising concerns about the debt, now rated six levels below investment grade.
The Open Bombardier needs to 'just deliver' what they promise: McGill's Karl Moore
Bombardier needs to 'just deliver' what they promise: McGill's Karl Moore
Karl Moore, professor of business strategy at McGill University, joins BNN Bloomberg to react to Bombardier slashing its outlook, warning on cash burn and considering pulling out of the A220 partnership with Airbus. He says that CEO Alain Bellemare has done an excellent job in a tough turnaround for the business.
Job Cuts
The delays and slow sales forced Bombardier to announce thousands of jobs cuts in 2016, with doubts over the future of the company pushing the stock to as low as 72 cents. The government of Quebec was forced to step in, investing US$1 billion for a 49 per cent stake in the C Series.
On Thursday, Bombardier tumbled anew, dropping 32 per cent to $1.22 at the close in Toronto. The shares are now at the lowest level in almost four years and the company’s market value is only about $3 billion (US$2.3 billion)..
The deal with Airbus was an elegant solution. Though Bombardier received no upfront cash for ceding its controlling stake, it allowed Bombardier to offload the risk and additional costs of developing the A220. But the latest financial plan calls for more cash to support the ramp-up, pushes out the break-even timeline, and generates a lower return over the life of the program, Bombardier said in a statement Thursday.
With few other assets left to sell, Bombardier may struggle to keep everything going. One of its two remaining businesses -- rail equipment and private jets -- may have to go, Karl Moore, an associate professor at McGill University in Montreal, said in an interview with BNN Bloomberg.
“Then you become a pure play of either transportation on the train side, or business jets,” he said. “It’s a big dramatic move for sure but one that might be necessary to solve the cash flow issue. I think that’s the question they’re giving some serious thought to right now.”
The potential end of Bombardier’s involvement in the A220 program is combining with continued woes in the company’s rail business to undermine a once-great name in manufacturing.
The company said fourth-quarter sales would be US$4.2 billion, trailing the lowest analyst estimate in a survey by Bloomberg. The results were dragged down in part by new challenges in the company’s rail division. Bombardier said it would take a US$350 million accounting charge because of problems in London, Switzerland and Germany.
Liquidity remains strong, with year-end cash on hand of roughly US$2.6 billion, Bombardier said. But the company is considering alternatives to accelerate its deleveraging and strengthen its balance sheet.
Bonds Resilient
“The final step in our turnaround is to de-lever and solve our capital structure,” Chief Executive Officer Alain Bellemare said in the statement. “We are actively pursuing alternatives that would allow us to accelerate our debt paydown.”
For Mark Carpani, a partner at Ridgewood Capital Asset Management, a larger selloff on the bonds could be a buying opportunity.
“Despite the equity reaction, the debt has a high probability of being paid in the short term,” he said.
The company’s 7.85 per cent bonds due 2027 fell 6.8 cents, the most on record but remain well above distressed levels at 95.3 cents on the dollar, yielding 8.8 per cent, according to Trace data. The US$1.5 billion in notes due 2025 dropped 5.7 cents to 96.3 cents on the dollar to yield 8.4 per cent, the highest since Oct. 31.
The company is scheduled to report full earnings Feb. 13.
WEIGH IN Which of these is the best option for Bombardier? Commercial-Jet Retreat Airbus said it would continue funding the A220 program “on its way to break-even.” The European aerospace giant owns a 50.01 per cent stake in the regional jet, with Bombardier retaining 31 per cent and state-backed Investissement Quebec holding some 19 per cent. Bombardier agreed to fund cash shortfalls for the program up to a maximum of $350 million in 2019, and $350 million cumulatively in 2020 and 2021, according to a press release announcing the venture in June 2018. Any excess shortfalls would be shared by the shareholders, the statement said.
Quebec’s economy and innovation minister declined to comment, according to a representative.
The jet added 63 orders in 2019, with 105 currently in service and a backlog of close to 500 planes. Airbus will begin producing the A220 on a second assembly line this year at its factory in Mobile, Alabama.
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