Bombardier upbeat on CSeries deal, but Moody’s sees higher risk of debt default

Oct. 26, 2017, © Leeham Co.: Bombardier and Airbus put a positive face on the former’s acquisition of 50.01% of the CSeries program, but Moody’s credit rating service wasn’t impressed.

The agency downgraded Bombardier’s already poor credit rating and changed the outlook to Negative from Stable.

Moody’s changed the “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,” it announced Tuesday.

“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.

The press release may be found here.

CRJ and Q400

Bombardier’s future in commercial aerospace is in doubt. The long-suffering CRJ program’s future depends on the US, where labor union Scope Clauses prevent the new Embraer E175-E2 and MRJ90 from entering service. These airplanes are too heavy under the current Scope contracts.

SkyWest Airlines of the US has an order for 100 MRJ90s and 100 E2s, but these are both conditional on easing the Scope rule. Trans States Airlines of the US has an order for 50 MRJ90s, which is likewise conditional.

The CRJ900 (but not the CRJ1000) meets Scope rules.

The carriers have the option of downsizing to the MRJ70 and, in SkyWest’s case, the lighter E175-E1. These could affect potential CRJ900 sales.

The CRJ backlog is thin and the airplane is a dated design. Bombardier is undertaking cabin upgrades, but the cabin remains uncompetitive with the passenger experience in the EJet and the MRJ—should the latter ever enter service; it’s now facing a delay of up to seven years.

The Q400 program is in worse shape than the CRJ. Although a major order for 25+25 was placed by Spice Jet of India, the largest in years, Spice Jet has a spotty financial history and India is notoriously challenging for airlines.

Rumors surfaced recently that Bombardier may have a buyer for the Q400 program, but these are unconfirmed. The CRJ’s future has focused more on whether BBD may terminate the program than sell it, but nothing is confirmed. Bombardier insists it remains committed to both programs.

39 Comments on “Bombardier upbeat on CSeries deal, but Moody’s sees higher risk of debt default

  1. “Bombardier insists it remains committed to both programs.”

    Like they insist that the cseries delivery target is still the same (until this week)…

  2. I can see why the downgrade, after all the US tariff ruling still hangs over BBD and Cseries ramp up is still struggling. However, I think the cuts they have made will start positively impacting cash, so I believe they will get to cash neutral even if they have to swing the axe aggressively.

  3. For those who may not be familiar with bond ratings, below is some basic information on bond ratings from a Kiplinger internet page on “Bond Basics”. Bonds with Moody ratings below Baa (i.e. Ba or any B rating without an “a” suffix), and all Moody C rated bonds, are referred to in polite company and/or bond sales offices as high yield bonds, and in non polite company or outside bond sales offices, as junk bonds. See the link after the quotes for the full page.

    “Most widely traded bonds are rated by at least one of the major agencies in the field — Moody’s Investors Service and Standard & Poor’s Corp. Fitch also rates bond issues for default risk.

    S&P Investment Grade Ratings: AAA, AA, A, BBB, BB, B
    Moody’s Investment Grade Ratings: Aaa, Aa, A, Baa

    S&P Speculative Grade Ratings: BB, B, CCC, CC, D
    Moody’s Speculative Grade Ratings: Ba, B, Caa, Ca, C

    Standard and Poor’s AA, A, BBB, BB, and B ratings are sometimes supplemented with a plus (+) or a minus (-) sign to raise or lower a bond’s position within the group. Moody’s applies numerical modifiers in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its rating; a 2 indicates a midrange rank; and a 3 indicates a ranking in the lower end of the generic rating category.

    The investment grades include bonds ordinarily bought by individuals and institutional investors seeking stable income and safety. BBB/Baa is the lowest rating that qualifies for commercial bank investments. It’s a borderline group for which, in Standard & Poor’s words, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal than for bonds in higher-rated categories.

    Dipping below BBB/Baa takes you into speculative territory. Because of their higher risk of default, such bonds must pay higher yields. “High yield” is the marketing name for what most people call junk bonds.”

    Read more at http://www.kiplinger.com/article/investing/T052-C000-S001-what-bond-ratings-mean.html#xgewLDgAT6VBlYW2.99

    Fro comparison, a 900 million USD bond offering by Boeing in February of this year was rated at A2 by Moody’s. See link below.

    https://www.moodys.com/research/Moodys-Assigns-A2-Ratings-to-Proposed-New-Boeing-Debt–PR_362113

    • I don’t know that polite it the right word.

      Maybe someone should call a space a space and call them high risk.

  4. As expected, following initial euphoria, reality is slowly sinking in. Boeing does not appear to be worried; they will continue to work hard to make sure a steep tarif applies to the Airbardier C-Series, regardless of where the aircraft is assembled.

    • It’s obviously nonsense that tariffs will apply to the C series with the same foreign content as the 787
      This only leaves Airbus with the option of doing a lot more work in the US. Forget all the legal guff, it’s political influence that counts. This would be pretty good for US jobs, but not for Boeing, it can’t be what they intend.

      • I understand from what was said on ‘airways mag’ blog, the US and EU have reciprocal treaties that dont allow tariffs on each other airliners.

        Had to laugh at the signing of the Singapore 787-10 order Trump, as usual, making a big deal about the 787 ‘made in america’.
        As this version has RR engines which could be coming from the Trent FAL in Singapore, its only going to be less than 50% US made by value.

    • That is a pretty simplistic view on things. Unsurprising from someone who has just studied political “sciences” and doesn’t understand aerospace.

      Consider the X-32. It had a single piece composite wing, which ran over the fuselage. The learning from that went straight into 787, probably saving Boeing a billion dollars or so in avoiding missteps. How do OEMs that don’t have a military “wing” get the equivalent? Well, there was the Next-Generation Composite Wing (NGCW) program. But that was part-public funds.

      [Note, of the four Western major OEMs, only Bombardier don’t design/build a military product.]

      So unless Mr Mikle can lay out a way to ensure no information passes from the defence side of an OEM to the civilian side, public aid is always going to exist.

      • Nothing useful from a small fighter wing like the X32 ( the loser to the F35) to go forward to the B787.
        More relevant was the Boeing part of the Northrop B2 bomber, the outer wing, remember its span is almost as much as a 747.

        • Apart from all the methodologies of design of course, and development of the tools used for it.

          Or the analysis methods and testing to validate those methods.

          Or the quality control of production.

          Or the lessons learned from the manufacturing processes themselves.

          But yes, aside from that, nothing useful.

          • Mitsubishi is building the wings for the 787, are you saying Boeing passed on information from the X32 wing to them ? In the end the X32 didnt go into production so there was no production quality control needed. And as a single piece 55 deg delta wing for the X32 what was was there to learn for high aspect ratio airliner wings?
            In the end it was obvious that the X32 design was wrong for the JSF, they were making big changes even after the prototypes were built and couldnt demonstrate both supersonic and VTOL in the same prototype.

  5. Bombardier recently had to pay a large sum to Skywest ($90mill) under its residual value guarantees for its parked CRJ200’s. That cant help the companys financial situation as it seems to be a ‘cash’ payment.

    • Even for little BBD, $90mill are peanuts.

      That was actually a win-win agreement.
      SkyWest avoided spending big $ in refurbishing those birds (before returning them to BBD).
      BBD avoided spending big $ in the residual value guarantees. Those birds just went straight to the desert, thus avoiding a steep dive in value for all the remaining CRJ200s still flying. (BBD owns / have stake of some CRJ200s).

      • Thanks for the info Ex Militart Engr,

        When I saw your post, I decided to look up SkyWest’s fleet out of curiosity. According to the Wikipedia page on SkyWest, their current fleet and orders are as follows.

        Currently In Service
        Bombardier CRJ 100: 8
        Bombardier CRJ 200: 185
        Bombardier CRJ 700: 87
        Bombardier CRJ 900: 36
        Embraer 175: 105

        Orders
        CRJ 200: 3 used being transferred form ExpressJet.
        Embraer 175: 14
        Embraer 175 SC: 30
        Mitsubishi MRJ90: 100

        Seems to me that it would be a concern for Bombardier that they are paying a major customer who has no new production Bombardier aircraft on order to send Bombardier aircraft currently in their fleet to the desert. By my understanding, maintaining one’s position as a manufacturer of aircraft or anything else requires continually taking in new orders from major customers.

        • I just realized that the SkyWest order for 100 E-175-E2’s, that was mentioned by Mr. Hamilton in his post, was not included in the Wikipedia SkyWest fleet page.

  6. Well the big question remains as to how much trouble the company is in and what happens.

    Worst case they get another infusion from Canada or Quebec.

    Kind of so what, the US has done that as well and its in the best interest of all to keep a tax paying job producing (and tax payers) going.

    Yea the CRJ is toast but scope clauses still hold and won’t go away.

    What do they get out of each US sale of a C Series?

    LH and Korean are on the delivery list and those should be good customers for the Montreal made Cs.

    P&W looks to be making all the right moves and the main issues should be resolved inside a year completely and improvements in the next few month wit the interim fixes.

  7. People have to get used to Bombardier = NOT CSeries program..

    The focus is on the rest of the BBD portfolio, not competing with Boeing.

    • Well, for a few years, of every dollar of airframe profit (whenever that happens), ~30% will go to BBD.

      Also, depending how the deal is structured:
      – does the BBD facilities sell the sub-assemblies to CSALP?
      – are the BBD facilities rented to CSALP?
      – have the BBD facilities been “sold” to CSALP as part of the deal?

      The first is a possible profit generator, but Airbus will no doubt be squeezing hard on CSALP pricing from their end. The middle is a definite generator of some profit. The latter is a disaster.

      • It is important that CSALP don’t get squeezed by BBD that start to overcharge for its properties and shipments. It is often the case when someone takes over the running operation and the old often part goverment owned old Company try to recuperate historical losses. Airbus should be used to gouverment meddling and should have the option to move fabrication to its own factories for similar parts including fabrication fixtures if BBD board start to squeeze CSALP. The bond derating sounds like a Boeing inflicted wound, for sure Airbus will lower cost for CSALP and increase sales once the deal goes through. After the subprime crisis it is surprising the EU has not banned Moodys and S&P for their historical rubberstamping of ratings, but the EU don’t have a rating institute of similar capacity yet, however that can only be a major SAP release away together with a big data software integration creating ratings in a scientific manner most likely after Brexit.

  8. Yeah, its hard to forecast it.

    The CSeries is in decent health. But Bombardier’s ability to generate profit back off it is now questionable.

    With scope unlikely to move, any incremental improvements to CRJ700/900 are probably going to return positively in terms of orders and profit per order.

    The Q400… needs a stretch. It would lower the higher production cost, not in absolute terms, but in per seat terms. It would also differentiate from ATR on more than just “we can go faster”. But, it’d need investment to do that. I don’t think the cash is on hand. It also looks like the engineering staff are facing another cull, so there won’t be the manpower either.

    Difficult times.

    • The CRJ900/1000 have many updates the Q400 needs. The stretch is already designed structurally many yeas ago.
      BBD could convert an old flight test Q400 to a Q400QC Quick change 99pax cargo hauling plane. CRJ latest Avionics, new landing gears, winglets, new bigger prop with new gearbox gear ratio, big cargo door, cargo PDU’s under seat/floor sections and even design optional retractable floats for at as a “Super Beaver” or let someone like ST Aerospace do it as BBD needs most of their C-series engineers to continiously improve the CS’s and reduce cost as the Airlines and owners expect. GE might pay for it to fit their new Engine/Gbx/prop onto it unless PWC pays up and get ok to put a Hamilton Standard prop onto it.

  9. I think this rating should be read backwards. It is clear that BBD were in far worse shape than they were prepared to admit. They have seemed to be stuck on the wrong side of the product life cycle on too many projects at once.

    My read is that the potential for a downgrade was already known and this was a fundamental catalyst in forcing the Cseries into the arms of Airbus for free.

  10. I would pay more attention to the expected contribution of the large Global 6000/7000 series executive jets. These are products with very favorable margin.

    • @Caerthal. More like 7000/8000 for the new Global. the 5000/6000 Have been selling for quite a while.

  11. Is there any way they can do a NEO on the CR900 to improve the efficiency?

    Airlines don’t seem to care so much for passenger comfort but prefer a good bottom line on their income statement. So if the plane could get closer to current efficiencies, it would possibly have some kind of future?

    • The NEO engine is much heavier than the current GE engine and would affect CG to the point that major design changes would be needed.

      • A heavier rear engined plane would just adjust the ratio of fuselage forward and behind the wing to achieve balance.
        GE Passport engines like they are doing for the G7000 are supposed to be 2066 kg while the CF34s used currently are around half that.
        DC9- to MD90 is a prime example of heavier engines going ok

    • Yes, they can do a re-engine of the CRJ.

      Passport is too heavy. But there are other options….

  12. I dont like BBDs chances at all.

    Trains are facing a chinese conglomerate and a newly built european champion (Alstom & Siemens) – might be okay short term as all are busy with their merger, but long term BBD is without a partner in a business scale effects counts.

    Airplanes do even look worse: Airbus will take over CS when it becomes a sucess. If not, they simply let it go.

    CRJ is outdated vs. E2 and facing Superjet and MRJ competition.
    With E2 and Superjet having price advantage due to currency and labour cost.

    Dash is up agains ATR – and Airbus didnt go for a update.
    Imo need a stretch to 100 pax- and those gear issues.

    Overall, BBD has:
    a isolated train department
    and a aerospace dep.
    with a minor share of it’s most modern family
    and 2 outdated, not well selling programs with a lot of competition.
    E2 jets will win big time against CRJ

    • My understanding of the so called gear issues is actually a maint issue.

      Horizon has flow it in AK for maybe 3 years now, Fairbanks sees -40 and lower.

      ANC has 0 and snow with lots of removal fluids on ramps.

      Never a problem.

  13. The sad story of how the CRJ900 went from top seller to distant second in the regional jet market. While Bombardier was busy chasing windmills, correction, busy chasing Airbus and Boeing, they forgot to check their tail and thus didn’t see Embraer moving up rapidly into firing position behind them with their gunsight centered dead on Bombardier’s flagship regional jet, until it was too late. The quotes below are from the February 2015 ATW Online article at the link after the quote.

    “The sales battle between the CRJ900 and the E-175, which in the last two years has significantly swung from Bombardier’s to Embraer’s favor, is a microcosm of Bombardier’s problems. Other, more high-profile missteps, such as Bombardier getting caught by surprise by re-engining programs at Boeing, Airbus and Embraer, have received more attention. But the rapidity with which the E-175 has overtaken the CRJ900 as the airliner of choice in the 75-90-seat jet sector (even Embraer executives are astonished by it) is something Bellemare should carefully study as he endeavors to figure out how to steady the ship at Bombardier.

    The CRJ900 and E-175 entered service in 2003 and 2004, respectively, and through 2012 Bombardier held a sizable edge in sales, with the CRJ900 winning 314 orders compared to just 181 for the E-175. But for the past two-plus years, Embraer has dominated the sales competition, winning 240 E-175 orders compared to only 70 CRJ900 orders. The E-175 has vaulted past the CRJ900 in lifetime orders, now leading 421 to 384.

    Why did this happen? Embraer modified the E-175’s wing to lower fuel burn by 6.4% and airlines looking for 75-90-seat regional jets increasingly gravitated to the Embraer aircraft over the CRJ900.”

    “Embraer expects a wave of 50-seat jet retirements in the US market over the next several years and is confident 76-seat E-175s will be the primary replacements for those aircraft. The CRJ900 will certainly get a share, but Embraer executives believe the E-175 could comprise 80% of the replacements or more.

    That’s because Bombardier was caught flat-footed and put in the position of playing catch up in the 75-90-seat regional jet sector (which it handily controlled a little more than two years ago), perhaps in part because the manufacturer was distracted by its costly CSeries venture, on which it has already spent $4 billion without yet bringing the aircraft to market.”

    http://atwonline.com/blog/crj900-vs-e-175-microcosm-bombardier-s-troubles

  14. Could not the Silvercrest turbofan be an option for the CRJ-700? It is not very heavy and being in early life maybe will be possible to have as increase the thrust by about 10-12%.

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