Bombardier maturity wall looms large after deleveraging plan jolted by COVID-19

Bombardier’s high-flying leverage is stressing its capital structure, as the plane maker’s operations come under pressure and planned asset dispositions face valuation and timing risks due to the economic fallout from the spread of COVID-19, according to four sources following the company.

The Montreal-based company is pursuing a multi-faceted dismantling of its operations, selling off its business units in parts in order to reduce debt on its 10.4x-levered balance sheet. But the market and societal shock from the spread of the novel coronavirus – especially drastic measures to reduce human movement – could halt or delay some of the company’s nearly USD 10bn in planned asset sales, the sources continued.

Meanwhile, the borrower has USD 2.7bn of near-term maturities that start to come due next year – part of a capital structure that has spun into distressed territory amid a cash burn that could deepen as a result of rapidly changing operating conditions, the sources said.

The company has USD 1.501bn of debt due in 2021, including USD 483m-equivalent 6.125% senior unsecured notes and USD 1.018bn 8.75% senior unsecured notes. It also has USD 1.7bn of debt due in 2022.

Meanwhile, yields for those impending maturities indicate Bombardier could be frozen out of the capital markets as investors price in the risk of holding the notes, the sources said.

The USD 1.02bn 8.75% senior unsecured notes due December 2021 have trended lower to last trade today at 79.5 to yield 24.303% from trades at 84 to yield 20.418% yesterday and 97 earlier last week, according to MarketAxess. 

The USD 1.2bn 6% senior unsecured notes due 2022 recovered slightly yesterday to 73.75 to yield 19.537% from trades at 73.063 to yield 19.956% on Monday. The notes were at 87.25 to yield 11.893% last week.

Off the train

All told, Bombardier’s previously planned asset dispositions would bring pro forma net debt to USD 2.5bn, down from net debt of USD 6.7bn currently, according to a company presentation. The moves downsize and refocus the company solely on its business jet segment, which makes the Learjet, Challenger and Global brands.

In 2019, the company entered into an agreement with Spirit Aerosystems to sell its Belfast and Casablanca aerostructures operations along with a Dallas maintenance facility for USD 500m and the assumption of USD 700m of liabilities. Bombardier also agreed to sell its CRJ series of regional jets to MHI for USD 550m.

In February, Bombardier transferred its shares in the Airbus Canada Limited Partnership (ACLP) to Airbus and the government of Quebec in exchange for USD 600m, of which USD 531m was paid on closing and the remaining will be paid over the next two years. 

And in its most transformative sale, Bombardier entered into an agreement with French manufacturer Alstom earlier this year to sell its transportation segment – where it makes trains – for EUR 5.8bn to EUR 6.2bn. That sale is slated to close in 1H21.

But the borrower said yesterday it was suspending guidance for 2020, including its prior projections for pro forma liquidity, according to a press release

The announcement, along with the economic backdrop, including widespread restrictions on travel, lead to higher uncertainty regarding execution of the asset sales – if they can even close at all, the sources said.

“Anything that’s transportation-related … people will question the valuation,” one of the sources said. “When you buy a business or part of a business, you’re buying it to hold it for a long time. [The buyers] need to look at it through that prism rather than where we are today,” one of the sources said, adding that the economy would eventually recover but the outlook for transportation companies could be drastically altered.

In response to inquiries, a Bombardier spokesperson said in an emailed statement, “We are still aiming to complete the transactions with MHI and Spirit by our target of mid-2020. The transportation deal is following its course and all parties are fully engaged in the process. With ample time ahead, this transaction is still expecting to close in 1H21.”

Liquidity flight

Any buyer backtracking or price re-striking on the asset sales would prolong Bombardier’s high leverage outlook and complicate near-term refinancing efforts, the sources noted.

The company is currently levered 10.4x based on LTM adjusted EBITDA of USD 896m and USD 9.34bn of total debt, according to filings. For comparison, Bombardier generated USD 1.3bn of adjusted EBITDA in 2018.

At the same time, the company was already expected to burn USD 235m of cash in 2020, before considering the impact of the coronavirus, based on USD 900m of consolidated adjusted EBITDA, USD 635m of interest expense and USD 500m of capex, according to two of the sources. The company burned through USD 1.2bn of cash in 2019, according to filings.

Despite a USD 14.4bn backlog in its business aircraft division, the spread of COVID-19 forced the company to adjust production – leading to the closure of most of its Canadian facilities for a month. The impact on EBITDA will be determined by how many customers pull their orders, offset slightly by lower production costs, the sources noted.

In the meantime, the company could use existing liquidity to buy back bonds at a discount or address them as they come due. As of 31 December, the company had USD 2.6bn of cash and USD 1.3bn of revolver availability. 

As an alternative, the company has very little ability to incur secured debt, according to Debtwire sister publication Xtract Research. There is no basket for secured debt, so the company can only issue secured debt if it acquires an asset or under the carveout for ordinary course liens on stock-in-trade, inventory or accounts receivable. 

For valuation comparison, public plane makers Embraer and Textron trade at respective 6.7x and 5.8x enterprise value multiples. Taking a 6x multiple of LTM adjusted EBITDA for Bombardier would cover its current debt structure at 57 cents on the dollar.

Bombardier, additionally, may have to rely on the Canadian government for funding, and given its large size and the number of people employed, the government is likely to extend aid as it has done in the past, according to two of the sources.

The government of Quebec invested USD 1.3bn into Bombardier’s C Series jet program for a 49.5% stake in the project in 2016, among other assistance measures. The Canadian government then injected USD 372.5m of federal loans into the aerospace segment.

“Regarding government aid, in support of the recent mandates from the Governments of Quebec and Ontario to help slow the spread of the COVID-19 pandemic,” the Bombardier spokesperson said, “we are taking actions and we are seeking to seize opportunities of support offered by all levels of government earlier this month and will be advocating for appropriate support the whole Canadian aerospace sector.”

2020 Debtwire

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