As Bombardier Inc. weighs its strategic options to tackle a crippling $9-billion debt load, its first priority could be to buy back the minority stake in its train business owned by Canadian pension giant Caisse de dépot et placement du Québec.
Bombardier struck a deal with the Caisse in November, 2015, to sell a 30-per-cent stake in the unit, known as Bombardier Transportation (BT), for US$1.5-billion. The deal bolstered Bombardier’s balance sheet at a critical time, replenishing depleted cash reserves used to bring the C Series jet to market.
Now however, some analysts say the partnership has landed top of Bombardier’s to-do list as it tries to deal with its financial obligations. The company issued another profit warning Thursday that wiped away one-third of its market capitalization and said it is “actively pursuing options to strengthen its balance sheet and enhance shareholder value" as questions mount about the company’s ability to generate enough cash to pay debt due over the coming years.
Not only are the terms of the BT deal expensive for the plane and train maker with a 15-per-cent minimum annualized return payable to the Caisse, they also come with an expiry date: It gives the pension fund the right to trigger an initial public offering or a sale for its stake in February, 2021.
“We believe that Bombardier’s decision to pursue its strategic options to solidify its balance sheet are directly related to its desire to buy back the Caisse de dépot’s stake in BT as soon as possible to avoid losing control of the asset,” Desjardins Capital Markets analyst Benoit Poirier said.
Bombardier could buy back the stake this year once it receives the proceeds from US$1.1-billion worth of asset sales already underway, he said. He estimated the company would have to pay US$2.4-billion, significantly above its fair market value of US$1.65-billion.
“Essentially [the Caisse investment is] a high-yield, leveraged note that’s secured by the transportation business,” said analyst Chris Murray of AltaCorp Capital, adding Bombardier’s other bonds pay out interest in the range of 6 per cent to 8 per cent. “That would obviously be the first thing to try to retire if you could.”
The deal also contains a provision whereby if the rail unit underperforms its business plan, the Caisse’s percentage of ownership on conversion of its shares rises by 2.5 per cent a year, up to a maximum of 42.5 per cent. Given the business’s current underperformance, the Caisse’s position is likely to rise.
Buying back the stake is “definitely a priority,” Bombardier spokeswoman Jessica McDonald said.
Investor anticipation of Bombardier’s next move came as credit ratings agencies S&P Global Ratings and Moody’s Investors Service on Friday cut their outlook for Bombardier to “negative” from “stable” in the wake of its profit warning. Bombardier blamed continuing challenges with specific rail contracts for the poor financial performance in fiscal 2019.
S&P said Bombardier’s outlook weakened its own conviction that the company can generate enough cash flow over the next couple of years to meaningfully reduce its very high debt leverage and manage financing risks. Moody’s said Bombardier’s management has a track record of not meeting its provided financial guidance.
Opinion among analysts and observers who follow the company appears generally unanimous that Bombardier will move to exit its joint venture with Airbus SE on the A220 aircraft in order to avoid having to sink more money into the partnership. Whether it will go one step further and exit aviation altogether by seeking a buyer for its business jet unit is less clear.
Unlike BT, which has solid growth prospects tied to efforts to counter climate change with train usage, Bombardier’s aircraft business is exposed to carbon and air pollution regulations for its customers, Moody’s analyst Jamie Koutsoukis said. Its longer-term prospects could also be affected by the growing “flight shaming” movement, she said. But those are only two factors to consider among many others, she said.
“If you were looking just [in terms of] credit, you would want the company that isn’t as cyclical to support debt,” Ms. Koutsoukis said. This has historically been the train business. “But it all depends on the valuation that they would get on it, versus leverage."