It may seem cruel, with all the bad news that has come out of Bombardier in the past week or so, to dwell on another negative item at the company.
But I'm going to anyway.
The company's deeply underfunded pension plans were little mentioned as we picked over last week's news that the company would suspend development of its eight-passenger Learjet 85 in order to maintain its big bet on its C Series airliner program.
It's deeply relevant, though, as the company also cut its 2014 cash flow estimate for its plane business, halving it from the upper end of its previous forecast.
Analysts are now asking questions about the company's liquidity, particularly if there are more delays in the launch of the C Series.
Bombardier Inc.'s pension plan situation doesn't help matters. The company operates several plans here and in other countries. At the end of 2013, the company had a pension deficit of about $1.7-billion (U.S.). That means the assets in the company's plans, about $8.3-billion, fall short of its estimate of its future liabilities of about $10-billion. (The company has an additional $335-million in unfunded retirement benefit liabilities from non-pension plans.)
The company's unfunded pension liability was easily the largest of any company on the Toronto Stock Exchange, according to research I did using Standard & Poor's Capital IQ, with Air Canada second at $1.3-billion. Bombardier's pension deficit is equal to about a year and a half's worth of EBITDA, or earnings before interest, taxes, depreciation and amortization.
There is a serious annual cost to keeping up with these plans. The company made more than $1.6-billion in pension contributions from 2010 to 2013, and has said it expected to put another $410-million in the plans in 2014.
The good news, as it is, is that things can get better. Pension-plan underfunding was $2.9-billion at the end of 2011, meaning it dropped by more than 40 per cent in two years.
A big part of this, for 2013, was an increase in the interest rate Bombardier used to calculate its liabilities. Pension payments, of course, are amounts owed to employees for many years into the future. In order to put a price tag on them in today's dollars, an interest rate must be used to calculate their "present value." A higher interest rate decreases the present value; a lower interest rate increases the present value.
Canadian corporations use a rate based on yields on high-quality corporate bonds. Interest rates rose globally in 2013, driving down the measure of liabilities across all Bombardier's plans, pension and non-pension, by $591-million.
As well, the plans' investments had a fine 2013, with an $848-million gain. That was the year the S&P/TSX composite index gained nearly 10 per cent. Roughly half of Bombardier's Canadian pension-plan assets are in bonds, with the other half in stocks and other assets.
And, it's worth noting, the company closed off the defined benefit (DB) pension plans to new, non-union hires in Canada and the United States in September of 2013. In the U.K., seven of nine DB plans are closed. So these new employees aren't increasing the plan liabilities. (It should also be noted that Bombardier's contributions to defined contribution plans, the replacement benefit vehicle for these employees, are approaching $100-million a year.)
How will 2014 turn out for Bombardier's pensions? We'll find out for sure when it discloses its annual financial results on Feb. 12. But early results are not promising: Interest rates went in the wrong direction – down – in the first nine months of the year, adding $1.2-billion back to its liabilities for its pensions and other retiree benefits as of Sept. 30. The overall deficit was $2.5-billion at that point.
To be clear, pensions aren't the biggest weight on Bombardier's fortunes – it's the combination of business weakness and corporate debt. But with Wednesday's surprise Bank of Canada announcement, interest rates won't be rising soon. And, along with its need to fund the company-changing C Series, Bombardier will have to find the cash for its company-challenging pensions.