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Inside the Market Why investors aren’t celebrating Bombardier’s latest asset sale

Bombardier’s share price rallied all of 6 cents, or 2.7 per cent, on Tuesday, after the CRJ Series deal was announced.

CLEMENT SABOURIN/AFP/Getty Images

If investors are concerned about Bombardier Inc.’s high level of debt, they won’t take much comfort from the company’s deal to sell its money-losing regional jet program: Bombardier’s balance sheet will improve only by a smidgen, and at a time when economic clouds are gathering.

On Tuesday, the Montreal-based plane and train maker announced that Mitsubishi Heavy Industries Ltd. of Japan will acquire its CRJ Series aircraft division for US$550-million in cash and assume liabilities worth about US$200-million.

Analysts applauded the move. When the deal closes, Bombardier will shed an unprofitable division at a price that was higher than earlier estimates. Bombardier doesn’t have the financial resources to make big updates to the planes, at a time when competitors such as Embraer SA are refreshing their offerings. And selling the division will improve Bombardier’s focus on its profitable business aviation and transportation divisions.

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“We are pleased with the transaction as it should enable management to focus its efforts and capital on the core businesses while solidifying the balance sheet,” Benoit Poirier, an analyst at Desjardins Securities, said in a note.

Kevin Chiang, an analyst at CIBC World Markets, maintained an “outperformer” recommendation on the stock. He expects that the share price will rise to $3.75 within a year, implying gains of more than 65 per cent.

“The sale of the program provides an incremental liquidity boost to Bombardier as it looks to address its elevated debt position; we continue to see the company on a path towards generating positive free cash flow. This move helps de-risk the Bombardier story,” Mr. Chiang said in a note.

Investors, though, are sitting on their hands. Bombardier’s share price rallied all of 6 cents, or 2.7 per cent, on Tuesday, after the deal was announced. On Wednesday, the shares closed unchanged, at $2.25. And the stock is down 55 per cent over the past year as a 2018 rally fizzled.

To be fair, the stock may be reflecting the sale of the CRJ program already, given that news of a deal leaked out a few weeks ago. The shares are up about 12 per cent since early June, suggesting that the market is quietly supporting the move to jettison the CRJ program.

But it’s hard to see much enthusiasm here, and one reason is that this deal alone will have little impact on Bombardier’s heavy debt load.

The company has nearly US$9.1-billion in long-term debt, or about $6-billion in net debt after subtracting its cash holdings. Analysts expect that the sale of the CRJ program, after factoring in Bombardier’s continuing liabilities associated with the program, will reduce net debt by a mere US$150-million.

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“In our view, the proposed transaction will have a limited impact on the company's business and financial risk positions, and as a result, our ratings on Bombardier are unaffected,” S&P Global Ratings said in a note.

The credit rating agency maintained a B-minus rating on Bombardier debt, which is highly speculative and below investment grade.

It doesn’t help that some market watchers believe that the economic outlook is deteriorating. U.S. government bond yields have slumped sharply this year, reflecting the widely held expectation that the U.S. Federal Reserve will need to cut its key interest rate to support a slowing economy – perhaps as soon as next month.

If the U.S. economy fails to respond to lower borrowing costs amid rising global trade tensions, Bombardier may run into lower demand for its business jets and investors could run toward safer bets.

The speculative outlook on Bombardier shouldn’t be confused with gloom, though. Analysts are largely upbeat that the company’s deal with Mitsubishi supports Bombardier’s goal of reducing debt – even incrementally – relative to EBITDA (earnings before interest, taxes, depreciation and amortization).

What’s more, debt reduction could improve substantially if Bombardier jettisons businesses in Belfast and Morocco that build fuselages and wings.

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Nicholas Heymann, an analyst at William Blair, estimates these aerostructure businesses could be worth up to US$1-billion. If sold, he believes that Bombardier’s net debt-to-EBITDA ratio could decline to about two by the end of 2020, marking a significant improvement over his year-end 2019 estimate of 3.5.

But the CRJ deal, on its own, offers little reason to cheer – which is why investors may be awaiting Bombardier’s next move instead.

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