Trudeau can play hardball with Bombardier: Bay Street has his back

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What a pickle our Prime Minister is in. Bombardier Inc., one of Canada's best-known companies, is begging for a billion bucks.

His predicament: The same executives who put the company in this precarious position, by blowing the C Series budget and mismanaging the entire project, leading to a nasty $3.2-billion (U.S.) writedown, are still calling the shots. Sure, they brought in a new chief executive officer and, yes, he's made some serious strategic changes. But the board is still run by executive chairman Pierre Beaudoin, who was booted as CEO 14 months ago.

The cherry on top? The same two families – the Beaudoins and the Bombardiers – still control the company through their multiple voting shares.

This quagmire typically generates one of two responses. For some, government support is a fait accompli. This is Bombardier, they say. No way Prime Minister Justin Trudeau, who is from Quebec, lets it tank. That nagging ownership issue? It'll die down.

Then there is the incensed lot, which includes my colleague Eric Reguly, who argue bailing out the company without demanding serious ownership changes would reward bad behaviour – "the equivalent of handing a BMW to your reckless son after he drove the Buick into a wall."

The best way to cut through these emotions is to turn to fundamentals. Financial markets are built on precedents and there are more than enough bailouts to inform the government's thinking. Call it a silver lining to the financial crisis.

Under normal restructuring rules, Ottawa has a few options. It can lend Bombardier more money; buy senior securities, such as preferred shares that pay a pretty penny in interest and convert into more and more common equity the longer they exist; invest in the C Series operations, the way Quebec did, and bet solely on that one project; or go the old-fashioned way and buy some common equity in the entire company.

We can rule the first option out – and probably the second, too. Bombardier doesn't want more loans or interest payments. The company already has $9-billion in debt outstanding. And Alain Bellemare, the CEO installed in February, 2015, wants to calm the market with long-term stable funding. In October, he said the company's evolution, which included Quebec's funding as well as cancelling some programs to shore up cash, were "all about giving confidence that the C Series will be there." Customers need assurance that the program "will be in service for many, many years."

So, an equity injection is the most likely outcome. But, by its very definition, equity means ownership, which means the government gets to call some shots. Even if Ottawa invests solely in the C Series – rather than the entire corporation, which includes Bombardier's train division – two Canadian governments would own the entire project. (Quebec bought a 49-per-cent stake for $1-billion in the fall.)

Bombardier, of course, is fighting back. The latest word on the negotiations: The two sides are at an impasse, largely over the ownership issue. Breaking news for Mr. Trudeau: This is a poker game and you're sitting on a pretty big stack right now. Smoke the other guys out.

The company wouldn't be coming to you if it wasn't desperate. It raised $1.1-billion (Canadian) from public shareholders in 2015 and those buyers have been burned, down 29 per cent on their share purchases. Good luck getting them back to the table, especially after some investors already passed on the first deal because of their concerns with the share structure.

Can a government really be so bold? Ask Barack Obama. When the United States bailed out General Motors in 2009, his restructuring team replaced about half the board and also booted several top executives, including the CEO. GM was also given strict orders, including slashing debt, selling divisions such as Saturn and Hummer and reworking its union contracts.

Also remember: It took GM two tries to get the money it desperately needed. The auto maker first went to the U.S. government in late 2008 and soon after he took office, newly elected Mr. Obama rebuffed the initial plans. The company had to prepare a much more thorough proposal before it went back.

Bombardier may think it has leverage – it's a big company with a bundle of Canadian jobs. But it can't rewrite market rules.

A blank cheque would set a dangerous precedent. If the federal government wanted to establish a new norm, it probably would have started with BlackBerry, because of its impact on Waterloo, Ont.

When he was running for office, then-MP Justin Trudeau was proud to stand his ground on issues such as Canadian citizenship and terrorism. It's time to show some grit on financial matters. I can assure him, on this one, Bay Street has his back.