Bombardier outlook upgraded to stable on better balance sheet

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Fitch Ratings affirmed Bombardier's corporate rating at "BB+" and revised its rating outlook to stable from negative due to reduced debt concerns and better cash flow.

The revision of the outlook reflects "higher than anticipated" free cash flow in fiscal 2011 and reduced concerns as to Bombardier's ability to manage its leverage and liquidity while it addresses "continued weakness" in parts of its aerospace markets and invests in new aircraft programmes, says Fitch.

Previously, there were "significant" uncertainties about global economic growth, demand trends for business jets and regional aircraft, order activity at Bombardier Transportation, Bombardier's margin performance, and the impact of these concerns on the Canadian manufacturer's operating cash flow.

"These risks have not been entirely eliminated, but aerospace markets are beginning to stabilise, and Bombardier has effectively managed its cost structure, including a reduction in production capacity at Bombardier Aerospace, enough to mitigate the negative impact on margins from lower sales during the past two years."

As a result, Fitch anticipates that Bombardier will generate sufficient cash flow to support new aerospace programmes and maintain high cash balances. The ratings are supported by the company's business diversification, leading market positions, a substantial backlog that helps to "buffer volatility in orders", and a "conservative debt structure".

Fitch views Bombardier's leverage as within a normal range for the current low point in the aerospace cycle. At 31 January debt/EBITDA was 3.1 times (x) compared to 2.6x one year earlier. The increase reflects lower sales and net debt issuance of approximately $500 million during fiscal 2011. The debt issuance contributed to an increase in cash balances which totalled nearly $4.2 billion at 31 January.

Free cash flow after dividends totalled $387 million compared with negative free cash flow of $431 million in fiscal 2010.

Fitch notes Bombardier's backlogs for turboprops and light business jets are "below sustainable levels" at current production rates, which could potentially result in production cuts during calendar 2011 if orders are not received early in the year.

It acknowledges the CSeries "carries risks related to execution, customer demand, competitive responses, and the performance of new technologies".

The ratings and outlook could be positively affected if margins improve at Bombardier Aerospace, new-aircraft programs are executed successfully, and free cash flow eventually increases from expected levels. Alternatively, ratings and outlook could be negatively affected if weak demand for business jets and commercial aircraft impairs operating results and liquidity.