OREANDA-NEWS. Fitch Ratings has downgraded Bombardier Inc.'s (BBD) Issuer Default Rating (IDR) to 'B+' from 'BB-'. Fitch has also downgraded BBD's long-term debt and bank facility ratings to 'B+'/'RR4' from 'BB-'/'RR4'. The Rating Outlook is Negative. A full list of rating actions follows at the end of this release.

The Recovery Rating (RR) of '4' for BBD's senior unsecured debt and bank credit facility supports a rating of 'B+' and reflects expectations of average recovery prospects (31 - 50%) in a distressed scenario. It is based on Fitch's going-concern analysis of BBD that incorporates the company's established market positions and solid backlogs at both BA and BT. The recovery analysis also incorporates an expected \$1.5 billion debt issuance which BBD has publicly discussed recently. Fitch's analysis treats this planned issuance as unsecured debt. The RR '6' for subordinated convertible debt and preferred stock reflects a low priority position relative to BBD's debt.

KEY RATING DRIVERS

The rating downgrade reflects the expected impact on BBD's credit metrics from negative free cash flow (FCF) and the company's planned debt issuance. FCF was significantly more negative than expected in 2014 and, based on BBD's planned capital spending and segment cash flow, Fitch believes FCF could be negative \$900 million - \$1 billion or more in 2015.

The Negative Rating Outlook incorporates execution risks for the CSeries, margin pressure at BA and BT, liquidity risks if BBD does not meet its target for raising capital, and uncertainty about the impact of potential actions by BBD related to its announcement last week that it would explore ways to participate in industry consolidation in order to reduce debt. Fitch assumes the new debt planned by BBD will be unsecured, but there could be concerns about the priority of existing senior unsecured notes if the new debt is secured or is issued at the operating level by a BBD subsidiary.

Negative FCF reflects BBD's capital spending plans of approximately \$2 billion in 2015 which is not declining as soon as anticipated, largely due to delays on the CSeries, but which also includes increasing spending for the Global 7000 and 8000 business jets. A key rating driver will be the level of capital spending and future improvement in FCF which Fitch believes could remain substantially negative through the next two or three years.

Excluding the impact of BBD's capital raising plans, Fitch believes cash balances and liquidity would be adequate through the current year but could become a larger concern in 2016. The company's planned debt issuance of up to \$1.5 billion and its estimated share issuance of \$600 million would provide a substantial liquidity cushion until development spending declines. Besides capital expenditures, BBD has approximately \$750 million of debt scheduled to mature in January 2016, and it estimates pension contributions at \$320 million in 2015.

Key rating concerns include CSeries development costs and entry into service (EIS) for the CS100 which BBD estimates will occur in the second half of 2015 following a significant engine-related delay in 2014. Fitch views BBD's estimated EIS window for the CSeries as challenging given the amount of new technology involved in the aircraft. There are currently 243 firm orders from approximately 15 customers - a relatively low level compared to other aircraft programs such as the Airbus 320neo and Boeing 737 MAX aircraft families which compete for at least a portion of the CSeries' potential customer base.

New net debt issuance would increase BBD's already high leverage. Fitch calculates debt/EBITDA was 6.1x at the end of 2014, and could increase above 7x depending on the amount of new debt. In addition, weak financial results increase the risk of a covenant breach under BBD's bank facilities, although covenants were in compliance at the end of 2014 and Fitch expects any necessary adjustment to the bank facilities would be an integral part of BBD's capital raising plans.

Low margins at BA and BT contribute to BBD's weak credit metrics. BA's margins before special items have recently been negatively affected by pricing pressure on new aircraft and reduced values on used aircraft. BA's margins will also be reduced by normal costs associated with the eventual ramp up of production on the CSeries and Global business jet programs. At BT, margins reflect execution challenges at BT on certain large projects as well as competitive pricing across the industry.

BBD initiated significant restructuring programs in both segments during 2014 and has estimated it would realize annual savings of \$200 million at BA and \$68 million at BT when completed. However, achieving these expected benefits could be slow.

BBD's liquidity at Dec. 31, 2014 included cash of nearly \$2.5 billion and approximately \$1.4 billion of availability under bank facilities. In addition to a \$750 million bank revolver available to BBD and BA that matures in 2017, BT has a separate EUR500 million revolver that matures in March 2016. Both facilities were unused. BA and BT also have letter of credit (LC) facilities that are used to support performance risk and secure advance payments from customers.

The bank facilities contain various leverage and liquidity requirements for both BA and BT, which remained in compliance at Dec. 31, 2014. Minimum required liquidity at the end of each quarter is \$500 million at BA and EUR600 million at BT. BBD does not publicly disclose required levels for other covenants. The lowest levels of covenant compliance typically come within the year instead of at year-end because of BBD's cash flow profile.

Rating concerns are mitigated by BBD's diversification and market positions in the aerospace and transportation businesses and BA's portfolio of commercial aircraft and large business jets. The company has continued to refresh its aircraft portfolio which should position it to remain competitive. The Global 7000 and 8000 aircraft are well positioned to take advantage of solid demand for large business jets and are scheduled for entry into service in 2016 and 2017, respectively. BBD's consolidated revenues (excluding currency impact) rose 10.8% to \$20.1 billion in 2014, and the company's order backlog totaled \$69.1 billion, or more than three times annual sales.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
--Negative FCF of \$900 million - \$1,000 million or more in 2015.
--Equity and unsecured debt issuance during 2015 provide a substantial cash cushion to offset significant negative FCF through 2017.
--Gradual improvement in segment margins at BA and BT from restructuring is partly offset by normal margin dilution at BA related to entry-into-service of new aircraft.
--CSeries entry-into-service occurs in the last half of 2015.
--Financial covenants remain in compliance.
--Aerospace deliveries in 2015 are close to, or above, 210 business jets and 80 commercial aircraft expected by BBD.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a rating downgrade include:

--BBD's planned issuance of equity and debt of up to roughly \$2 billion would boost cash to a level that removes liquidity as a near term concern through the next two years. In the event that the amount of capital raised is significantly less than planned, or if cash deployment is larger, liquidity could become a concern sooner. Fitch would view liquidity as a concern if cash balances fall materially below \$2 billion for longer than one or two quarters.
--Inability by BBD to rebuild FCF at a pace that recovers to a break-even level by 2018. Fitch expects little improvement in FCF in 2015, and possibly in 2016, compared to negative \$1 billion in 2014 (excluding the impact of changes in factored receivables). FCF may not become positive before 2018.
--The CSeries is delayed again or there are significant order cancellations.
--Restructuring initiated in 2014 fails to address execution issues at BT or fails to generate improved margins at BA, adjusted for the impact of dilution from entry-into-service of new aircraft.

The rating outlook could be changed to stable if BBD's capital spending and operating results indicate FCF will approach a breakeven level by 2018. Other developments that could support a stable rating outlook include clear progress toward higher segment operating margins, entry-into-service as planned for the CSeries, solid order rates for business and regional aircraft, and strategic actions which reduce leverage.

Fitch has downgraded BBD's ratings as follows:

--IDR to 'B+' from 'BB-';
--Senior unsecured bank revolver to 'B+'/'RR4' from 'BB-'/'RR4';
--Senior unsecured debt to 'B+'/'RR4' from 'BB-'/'RR4';
--Preferred stock to 'B-'/'RR6' from 'B'/'RR6'.

The Rating Outlook is Negative.

BBD's debt at Dec. 31, 2014, as calculated by Fitch, totaled approximately \$7.8 billion. The amount includes sale and leaseback obligations and is adjusted for \$347 million of preferred stock which Fitch gives 50% equity interest. The debt amount excludes adjustments for interest swaps reported in long-term debt as the adjustments are expected to be reversed over time.