Bombardier recovery plan execution will determine future free cash flow
Bombardier’s latest refinancing transaction helps the company extend its maturity runway by at least three years, according to six sources familiar with the situation. But the business jet manufacturer still faces multiple pressure points from elevated leverage, lofty capex spend, high fixed interest expense and a cyclical and competitive market, the sources added.
Led by JPMorgan, the borrower last week priced USD 750m 6% senior unsecured notes due 2028 at par, which came in line with price talk. Proceeds from the deal will redeem the company’s outstanding balance of its USD 514m 6% unsecured notes due 2022 and its USD 534m 6.125% unsecured notes due 2023.
Leading up to the transaction, Bombardier sold its transportation business to Alstom in January 2021 for USD 3.6bn of net proceeds. Following the sale, the company repaid USD 2.7bn of debt for maturities between 2021 and 2023. In June 2021, it refinanced USD 1bn of debt for maturities in 2022 and 2021.
With the latest bond issuance, Bombardier’s next maturity doesn’t take place until 1 December 2024 when its USD 1bn 7.5% senior unsecured notes come due. Next up – USD 1.5bn 7.5% senior unsecured notes will come due 15 March 2025, followed by USD 1.2bn 7.125% senior unsecured notes due 15 June 2026.
Investors pointed out that Bombardier’s new maturity runway is a big plus for the company, as it has traditionally had to address near-term maturities accompanied by a sizeable cash burn. The extended runway now allows the company to grow its market share while increasing productivity and pursuing cost reductions.
For 2Q21 ended 30 June, revenue totaled USD 1.524bn, compared to USD 1.223bn in 2020, according to SEC documents. The increase was credited to increases in aircraft deliveries and services. In the quarter, the company generated USD 143m of adjusted EBITDA, versus USD 31m in the prior year period.
Despite the improved earnings, Bombardier’s leverage remains sky-high, a concerning metric for investors. Pro forma leverage shakes out to 12.3x through USD 7.08bn of total debt and USD 575m of projected 2021 adjusted EBITDA, according to company documents.
After reporting 2Q21 earnings and prior to the latest debt issuance, the company revised its 2021 cash burn guidance to USD 300m from previous guidance of USD 500m. The company also expects to generate at least USD 575m of adjusted EBITDA in 2021, compared to previous expectations of USD 500m.
“Bombardier’s raised guidance stems from all-around solid execution in the first half of 2021, greater confidence in market momentum, and [the company’s] ability to accelerate initiatives supporting our recurring savings objective,” said Éric Martel, Bombardier CEO in the 2Q21 earnings report.
Post the latest deal, investors are modeling a USD 200m to USD 350m cash burn for 2021, based on USD 575m of adjusted EBITDA, USD 250m to USD 400m of capital expenditures and USD 523m of pro forma interest expense. Estimates for capex vary widely, given the challenges in handicapping aircraft deliveries and pegging the cost associated with the ramping up of Global 7500 jets, a key priority for Bombardier.
Looking ahead, the company is aiming to generate USD 1.5bn in adjusted EBITDA and USD 500m in free cash flow by 2025. In order to achieve those targets, Bombardier plans to benefit from the improved unit cost of the Global 7500 aircraft and growth of the aftermarket services segment. The company also aims to implement USD 400m of cost savings by 2023, including USD 150m in headcount reductions.
To get to free cash flow positive, the company will also need to build on the existing services business, which will rely on the recovery of business jet utilization worldwide.
The company holds good market share in the overall business jet industry, backed by a strong backlog, the sources added. As of 30 June, the company’s backlog totaled USD 10.7bn.
While the company’s backlog is promising, execution will play a pivotal role in the company moving from cash burn to cash generation in the next few years, the sources said.
S&P predicts that Bombardier’s discontinuance of the Learjet small aircraft production should also help profitability beyond 2021.
Still, the company could be impacted by the spread of the Delta variant strain of COVID-19, according to three of the sources.
Pro forma last week’s bond deal, the company’s cash balance totals USD 1.277bn, according to a company presentation.
On a relative value basis, sources place Caa1/CCC+ Bombardier well wide of its peer A2/A- rated General Dynamics, the manufacturer of Gulfstream business jets due to GD’s larger scale, diversified business and lower leverage.
GD’s USD 750m 3.5% senior unsecured notes due 2027 traded on 12 August at 111.321 to yield 1.342%, in line with recent levels, according to MarketAxess.
Bombardier’s new USD 750m 6% senior unsecured notes due 2028 last traded today at 99.375 to yield 6.118%, according to MarketAxess.
JPMorgan and Bombardier declined to comment.
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