(Bloomberg circulated the following story on May 27.)
WASHINGTON, D.C. — Bombardier Inc. Chief Executive Paul Tellier, who took over the world’s third-largest airplane maker in January, has raised C$1.2 billion ($880 million) in a stock sale and targeted more than 3,000 job cuts as he seeks to keep the company from losing its investment-grade credit rating.
He’s in danger of failing after Bombardier this month had to split a $4.3 billion order from U.S. Airways Group Inc. with it’s chief rival. Standard & Poor’s and Moody’s Investors Service, the biggest credit-rating firms, have said Tellier will have trouble increasing cash flow and rebounding from last year’s C$615 million net loss unless the airlines recover from their worst slump.
“They’ve got to keep the books full, and they’ve got to keep (production) going,” said Bill Girard of Scotia Cassels Investment Counsel, which owns Bombardier bonds.
Bombardier today is expected to report that fiscal first- quartet profit dropped to 4 Canadian cents a share, the average estimate of analysts surveyed by Thomson Financial. A downgrade of Bombardier’s debt rating would trigger repayments of as much as C$1 billion to customers and bondholders and hurt earnings.
The company had profit of 15 cents a share in the year-ago quarter, when it sold more Challenger and Learjet corporate jets. Bombardier’s stock has gained 20 percent since April 7 after the company boosted its share sale by half and set a price of C$3.25 each. The stock fell 5 cents to C$3.92 in Toronto as of 9:57 a.m.
Credit Support
Tellier has staved off a downgrade by raising the cash and cutting the company’s dividend. He also put Bombardier’s snowmobile and boat-making unit up for sale.
Until March 5, when Bombardier disclosed that earnings for the year ended Jan. 31 fell short of its forecast by half, the stock was recommended by eight of the 16 analysts who had rated it this year, according to Bloomberg data. Five subsequently cut their ratings and five now consider it a “sell,” or expect the shares to lag peers or the market.
Capital Group Cos., the third-largest U.S. mutual fund company, sold more than 20 million Bombardier shares from January through March, according to Bloomberg data. Mackenzie Financial, a unit of Canada’s biggest mutual fund manager, sold at least 2.8 million shares during that time.
Losing half of the U.S. Airways order for 170 planes to Empresa Brasileira de Aeronautica SA, Bombardier’s main rival, may force Tellier to deepen costs cuts and speed up asset sales to prevent the company’s BBB- rating from getting cut to so-called junk status, investors said.
“There aren’t going to be a lot of orders,” S&P analyst Kenton Freitag said.
Bombardier spokeswoman Dominique Dionne declined to comment. Tellier, through Dionne, denied an interview request.
Confidence
Some investors said Tellier, plucked from Canadian National Railway Co., won’t inspire more confidence until he generates more orders and proves that Bombardier, which is also the world’s biggest maker of train cars, has put its credit concerns to rest.
“I’m sure the (stock sale) helped a lot, but it’s still not an investment-grade stock,” said Doug Davis of Davis Rea Ltd., a Toronto money manager that owns Bombardier shares. “The company is still a highly speculative investment.”
Orders for regional jetliners, which seat 50 to 100 people and had remained more buoyant than corporate demand, have been drying up. The business from U.S. Airways is Bombardier’s only big order so far this year.
Under Tellier’s predecessor, Robert Brown, Bombardier doubled the amount of interim loans it gave to new customers last year to bring in orders. Some airlines have since threatened to postpone deliveries they were scheduled to receive this year.
Delayed Deliveries
Atlantic Coast Airlines Inc., for example, has been negotiating for a delay in some of the 35 planes it was scheduled to get. The carrier gets 85 percent of its business from United Airlines, whose parent filed for bankruptcy in December.
Without a pickup in demand, Montreal-based Bombardier may have to reduce the value of the aircraft backing up its customer loans, resulting in losses in its financing unit, Davis said.
Any deterioration in the pace of business may lead Moody’s and S&P to cut Bombardier’s debt ratings to junk, the rating companies have said. According to Bombardier’s April 9 prospectus, that would force it to return $327.5 million of advances to customers, pay back $300 million in debt and wind down C$305.8 million in “securitization conduits.”
Such payments would all but negate proceeds from Bombardier’s stock sale and constrain its ability to buy materials it needs to manufacture. Junk ratings typically make it more difficult for companies to borrow, and Bombardier has C$1.5 billion in bank loans maturing in the next few months that it needs to renew.
Job Cuts
Tellier has said recent cash infusions should keep S&P and Moody’s at bay and has focused on completing the sale of the snowmobile unit and implementing the job cuts he has announced.
Blackstone Group LP, Thomas H. Lee Partners and Texas Pacific Group are in talks to buy the business for about C$1.3 billion, people familiar with the situation said last week. The Bombardier family, which has a 17 percent stake in the company and 55 percent of the voting rights, will also bid, spokesman Luc Beauregard said.
Tellier, 64, in March cut 350 positions in Bombardier’s railcar unit and reached an agreement with unions on 665 of the 3,000 aerospace jobs he wants to eliminate by yearend.
Solid-Gold Reputation
His success at similar cost-cutting made Tellier’s reputation as one of Canada’s most capable CEOs while he served at Canadian National. In a decade there, he brought its operating ratio — a measure of expenses as a percentage of sales and the industry benchmark — to the lowest of any North American railroad.
Tellier’s best bet at spurring new sales may be a matter of sealing business that Bombardier has already won. At the end of January, customers had options to buy 1,163 aircraft from previous sale agreements, including 355 at Delta Air Lines Inc., which has the biggest fleet of Bombardier planes.
“They’re going to have to start converting their options into orders,” said Stephen Laciak, analyst for National Bank Financial. “For this type of business, you’ve got to be able to plan your production out two years.”