OREANDA-NEWS. Unsecured recovery prospects are average for Bombardier Inc. (BBD) as it continues to address negative free cash flow (FCF) and a weak balance sheet, according to calculations by Fitch Ratings.

Our Spotlight Series report on BBD describes Fitch's recovery analysis and other rating topics, including Fitch's rationale for continuing to equalize BBD's unsecured debt ratings with the company's issuer default rating (IDR) of 'B'/Negative.

Recent positive developments at BBD improve the company's prospects for building stronger operating results, including firm orders from Delta and Air Canada, which have boosted the case for the long-term success of the C Series. Outside equity investments in BBD's businesses earlier this year supported the company's liquidity.

Fitch believes that BBD will be challenged to achieve its target of positive FCF by some time in 2018. Its aerospace programs are complex and there are inherent risks in executing operating improvements across the aerospace and transportation businesses. Fitch estimates FCF in 2016 will be approximately negative $1.3 billion, an improvement from negative $2.0 billion in 2015, when a transition to lower business jet production was initiated. Fitch estimates FCF could be significantly negative through at least 2018 and that a return to positive FCF would be more likely in 2019 or even 2020.

The sales of equity stakes in the C Series and transportation businesses solidified BBD's liquidity, allowing it to fund its cash burn through at least 2017. However, the equity stakes also reduced BBD's share of future profit and cash flow, which could further pressure the company's credit metrics on a pro forma basis. The transactions have a near-term positive impact for debtholders, but the long-term impact is less certain due to the smaller claim on future earnings and FCF. 2018 is a year to watch as several bonds mature.

Fitch's recovery analysis illustrates likely average recoveries for BBD's unsecured debt in a distressed scenario, leading to a 'B/RR4' rating. This is despite a concentration of debt at BBD's corporate level that creates some concerns about potential limitations on recoveries by debtholders. As the ultimate parent, BBD is entitled to all of the earnings and cash flow at Bombardier Transportation (BT), excluding the 30% equity investor's share. However, BT has few operating ties to BBD's aerospace business (BA), and BBD's debtholders would be structurally subordinated to BT's creditors.

Furthermore, Fitch's recovery analysis assumes that, in a distressed scenario, BT is separated from BBD and is excluded from bankruptcy. Under this scenario, Fitch assumes a fair valuation is received for BBD's 70% interest in BT, with the value added to BA's stand-alone going concern value. Fitch's recovery analysis produces good recoveries, but C Series risks include earnings dilution and negative cash flow during the next few years. When considering these risks, Fitch's recovery analysis leads to a rating for BBD's senior unsecured debt equal to the IDR of 'B'.