(The National Post published the following article by Sean Silcoff on its website on March 28.)
MONTREAL — Market skittishness over Bombardier Inc.’s financial crisis worsened yesterday as its common stock plunged to new depths in heavy trading.
The stock fell by 15% to $2.56 just after trading began yesterday, its lowest point since Sept. 2, 1994, before recovering to close up 2¢ to $2.92. More than 18 million shares changed hands, making it the most heavily traded issue on the Toronto Stock Exchange.
“It’s a collection of everything. There’s no good news anywhere,” said Steve Laciak, a National Bank Financial analyst.
But Roman Franko, a Dundee Securities technical analyst, warned the stock could fall further after yesterday’s rebound. “I think the next major move is toward the $2.25 zone, and$2 is not out of the question,” he said. “Selling is overwhelming buying; downward momentum is strong.”
Bombardier stock is down by 45% since the beginning of the year.
Brendan Kyne, president of Leeward Hedge Funds Inc. in Toronto, said he has heard from trading desks in Canada and the United States that investors are shorting the stock in anticipation of an equity offering, likely a convertible debt offering.
“That’s the reason why the stock is down,” he said.
Meanwhile, Bombardier bonds were off slightly yesterday after climbing several points in recent days. Mr. Kyne said he has heard investors are hedging their short positions by buying bonds, driving up bond prices.
Next Thursday, chief executive Paul Tellier will unveil his plan to pull the heavily leveraged transportation giant out of a liquidity crisis and prevent its credit rating from being cut to junk status — a move that could force Bombardier to find over $1-billion in cash and financing and strain its already weak balance sheet.
Analysts expect the company will issue between $1-billion and $1.5-billion in equity and sell some assets, including all or part of its finance arm and the recreational products business. Some suspect the dividend could also be cut.
“People fear uncertainty, and there’s a lot of uncertainty right now,” said one institutional portfolio manager.
Canaccord Capital analyst Bob Fay said, “They’d better come through with something dramatic next week. Things have to be stabilized.”
An equity offering could run into difficulties given the soft market and questionable investor appetite for large issues from aerospace companies. Last week, CAE Inc. pulled a US$100-million convertible debenture offering after hostile investor reaction. In addition, a stock issue by Bombardier in the range of analyst estimates would result in 30% to 45% dilution of the stock.
Meanwhile, the outlook for Bombardier’s aerospace division, which makes regional and business jets and usually accounts for the bulk of profits and cash flow, grows less certain by the day.
Yesterday, Bombardier’s rival, Empresea Brasileira de Aeronautica SA (Embraer), said fourth quarter profit fell 13.5% from a year earlier to US$77.4-million. CEO Mauricio Botelho said he didn’t see a recovery in the aviation sector until at least the end of 2004.
Salomon Smith Barney analyst Stephen Trent cut his forecast for Embraer jet deliveries in 2003 and 2004 to well below the company’s forecast of 132 and 136 units, respectively, citing past trends in the aviation market.