Fitch Ratings downgrades Bombardier one notch to BB with stable outlook

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MONTREAL - Fitch Ratings has downgraded Bombardier's default and long-term ratings one notch to BB with a stable outlook after the Montreal-based plane and train manufacturer reported weaker-than-anticipated results and negative free cash flow in the third quarter.

The results announced last week were impacted by a slow recovery in regional aircraft and business jet markets and challenges at Bombardier Transportation.

Heavy usage of cash is being driven by high capital spending for several aircraft development programs, notably the CSeries and Learjet 85.

Fitch said it anticipates that free cash flow could end up positive for the full year in 2013, but will start negative as capital spending in the aerospace division more than offsets cash generated by the railway segment.

Capital expenditures at Bombardier Aerospace could near US$2 billion in 2012 and 2013 after totalling US$1.3 billion last year.

Bombardier's leverage increased with US$500 million of new debt issued in the first quarter and weaker results in 2012.

"Credit metrics may not improve significantly until the regional aircraft and business jet markets recover and Bombardier Aerospace gets beyond its peak program expenditures," Fitch said Monday.

Fitch said demand for regional aircraft reflects a lack of confidence by major airlines, concerns about turmoil in Europe, high fuel prices and airline industry capacity. Demand for large business jets, where Bombardier is a global leader, is stronger than light jets, but remains below peak levels.

Bombardier announced last week a six month delay in the first flight of the CSeries to June, and a corresponding delay to the delivery of the airplane's smaller model. The larger CS300's delivery schedule is unchanged.

Transportation is taking a US$150 million charge in the fourth quarter as it lays offs 1,2000 workers around the world, including 350 affected by the closure of a plant in Germany.

Last week, Moody's Investors Service affirmed several of Bombardier's ratings, but changed its outlook to negative from stable and lowered its speculative grade liquidity rating, citing similar concerns as Fitch.

"The outlook change and lowering of Bombardier's liquidity rating is driven by the company's higher than expected cash consumption in 2012 and our view that the company's negative cash flow trends will persist through 2013", stated vice-president Darren Kirk.

He said the outlook is negative because Bombardier has consumed more cash than Moody's expected in the past couple of years.

"A continuation of this trend would lead to a downgrade given that Bombardier's leverage is very high for the rating," Moody's added.

He said the rating could also be downgraded if the CSeries is further delayed or leverage isn't reduced over 12 to 18 months.

Bombardier's shares closed at C$3.37, down six cents or 1.75 per cent, in Monday trading on the Toronto Stock Exchange.