Moody's downgrades Bombardier to B3, outlook revised to negative

Toronto, October 24, 2017 -- Moody's Investors Service ("Moody's") downgraded Bombardier Inc.'s ("Bombardier") Corporate Family rating (CFR) at B3 from B2, its probability of default rating to B3-PD from B2-PD, and its senior unsecured rating to Caa1 from B3. The company's speculative grade liquidity rating is affirmed at SGL-2. Bombardier's rating outlook has been changed to negative from stable.

"The downgrade reflects our expectation that Bombardier's leverage will remain high through 2019 and its ability to generate positive cash flow in that year has headwinds related to the potential delay of C Series plane deliveries" said Jamie Koutsoukis, Moody's analyst.

..Issuer: Bombardier Inc.

Downgrades:

.... Corporate Family Rating, Downgraded to B3 from B2

.... Probability of Default Rating, Downgraded to B3-PD from B2-PD

....Senior Unsecured Regular Bond/Debentures, Downgraded to Caa1 (LGD4) from B3 (LGD4)

..Issuer: Broward (County of) FL

....Backed Senior Unsecured Revenue Bonds, Downgraded to Caa1 (LGD4) from B3 (LGD4)

..Issuer: Connecticut Development Authority

....Backed Senior Unsecured Revenue Bonds, Downgraded to Caa1 (LGD4) from B3 (LGD4)

Affirmations:

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

Outlook Actions:

..Issuer: Bombardier Inc.

....Outlook, Changed to Negative from Stable

RATINGS RATIONALE

Bombardier's B3 CFR is constrained by its significant financial leverage (nearly 14x at Q2/17), execution risk on its new aircraft programs (the C Series and Global 7000), increasing competitiveness in its aircraft and rail transport businesses, and an uncertain ability to generate positive free cash flow in 2018, but mitigated by good liquidity for the next year, significant scale and diversity and an existing 4 year order backlog at in its transport business. Moody's expects consolidated LTM adjusted debt to EBITDA to decline to about 9x at year end 2018 from 14x at June 2017. However using a proportional accounting (70% of transportation, 50% of C Series) it will be as high as 14x at year end 2017 and 13x at year end 2018. Furthermore cash to Bombardier from Bombardier Transport is through a dividend, the size of which it does not unilaterally control as approval for dividends is required by the Caisse de depot et placement du Quebec.

Bombardier and Airbus SE's agreement to create the C Series Aircraft Limited Partnership (CSALP) could invigorate interest in, and improve the long term prospects for the aircraft program which has not seen new sales in over 18 months, but still faces US countervailing duties that may slow the production ramp up of the program and increase cash consumption. Airbus will receive 50.1% of CSALP for nothing upfront, and it has the option of buying Bombardier and the Province of Quebec out of the C Series entirely in future years. The structure of the partnership reflects the low value of the C Series currently and calls into question Bombardier's future in the commercial aircraft space. Bombardier will continue to fund 100% of cash consumption in the program, up to $700 million, through to breakeven cash flow, expected in 2020. Also the program continues to have uncertainty regarding the imposition of duties by the US Department of Commerce (preliminary announced duties of 300%) that would affect Delta Airlines' order of 75 C Series planes, which is about 25% of current backlog. The new partnership may construct a C Series assembly facility at Airbus' plant in Alabama in order to circumvent US tariffs on the plane, but this will likely mean a delay in deliveries to Delta, which was supposed to have started next spring, and could then delay cash flow breakeven. Additionally, we believe the size of and demand in the 100-150 seat aircraft market (in which the C series competes) is unclear. Airbus and Bombardier have forecasted demand to be up to 6,000 additional aircraft over the next 20 years in this segment, however historically, programs targeting the market have not sold well.

Alstom and Siemens have announced plans to combine their respective rail equipment manufacturing businesses, which will increase competition at Bombardier Transport within the next three to five years, particularly in the key European market. Bombardier will not match the scale of Siemens-Alstom in rolling stock and signaling, and the merged entity will also have higher operating margins and a stronger financial position than Bombardier. However, the merger is expected to close at the end of 2018, followed by several years of integration, so the impact on Bombardier will likely occur after this timeframe. It is possible that Bombardier Transport will become a valued second European supplier of passenger railcars, and the only large alternative to Siemens/Alstom, apart from the very large Chinese competitor CRRC.

Bombardier has good liquidity (SGL-2), with $3.3 billion of available liquidity sources versus Moody's estimate of breakeven free cash flow through the twelve months to June 2018 and minimal debt maturities, assuming the Delta C Series contract remains unchanged. We do however expect large swings in working capital quarter to quarter for the C Series and Global 7000 production ramp ups. At June/17, Bombardier had available cash of $2.2 billion and $1.1 billion (USD equivalent) of unused revolvers ($400 million at Bombardier Aerospace due June 2020 and EUR 590 million at Bombardier Transport due May 2020). Bombardier's bank financial covenants are not public, but they include minimum liquidity and maximum leverage requirements. Moody's expects the company will maintain headroom against the covenants. The company does not have any material debt maturities until 2019, when $600 million is due, followed by $850 million in 2020, and $2.3 billion in 2021. We expect the company will generate free cash flow of $400 million for the last two quarters of 2017 (it has consumed $1.5 billion in free cash flow in the first half of 2017) and may be near cash flow breakeven in 2018 as the C Series commercial jet program ramps up towards its own breakeven in 2020 and the Global 7000 business jet program approaches entry into service in the latter part of 2018. However with the uncertainty about the timing, and how the company will sell the C Series into the US, Bombardier could continue to generate negative free cash flow in 2018 dependent on a final US duty ruling.

The negative ratings outlook reflects Moody's uncertainty over Bombardier's ability to achieve breakeven cash flow in 2018 and 2019 and its ability to refinance material debt maturities that begin in 2019. It also reflects longer term concern about Bombardier Transport's competitiveness in the face of the Siemens/Alstom rail transport merger.

Bombardier's CFR rating could be upgraded if 1) the company produces sustainable free cash flow in excess of $400 million, 2) adjusted financial leverage (on a proportionally consolidated basis) reduces below 6.5x, and 3) the company is able to secure additional C Series orders, increasing the long term viability of that aircraft.

Bombardier's CFR rating could be downgraded if 1) Bombardier experiences challenges in any of its businesses that will likely lead to continuing negative free cash flow past 2018 2) if Moody's develops concerns over the adequacy of the company's liquidity and, 3) if Moody's has increased concerns regarding Bombardier's ability to refinance its debt or the sustainability of its capital structure.

The senior unsecured rating of Caa1 is one notch below the corporate family rating of B3 because the Caisse de depot et placement du Quebec's 30% ownership of Bombardier Transport, where nearly all of Bombardier's consolidated cash flow is generated, is in preferred shares which rank ahead of the Bombardier Transport ordinary shares owned by Bombardier and therefore rank ahead the senior unsecured debt at Bombardier on their claim to Transportation's assets.

The principal methodology used in these ratings was Global Aerospace and Defense Industry published in April 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Montreal, Bombardier Inc. is a globally diversified manufacturer of business and commercial jets as well as rail transportation equipment. Annual revenues were about $16 billion in 2016.

REGULATORY DISCLOSURES

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