Bombardier Inc. is billing its new financing plan as the best way to invest for the future, but deep down, this initiative is the manifestation of major debt woes.
For the first time in 12 years, the Canadian aerospace giant is going cap in hand to shareholders, asking for a fresh $600-million (U.S.) in new equity. Under a brand new chief executive, Bombardier will also explore asset sales to raise cash.
Officially, these plans will "position [Bombardier] with a flexible and strong financial profile." Dig through the financial disclosures, though, and you'll see management admits their long-term objective is to "improve leverage metrics by de-leveraging the balance sheet with strategic long-term debt repayments."
That's certainly a mouth full of corporate-speak, so let me decode it for you: Bombardier desperately needs to lower its debt.
This can be confusing, considering that Bombardier also announced plans Thursday to raise as much as $1.5-billion in new debt. Why issue more when you ultimately need to lower your existing stockpile?
Simple – because Bombardier needs immediate funds for capital spending. In its year-end disclosures, the company comes right out and says it requires cash for capital spending, particularly to fund Bombardier aerospace's operations. Because the corporation is projected to have negative cash flow in both 2014 and 2015, they need to fill the gap somehow.
Pieced together, the plan makes sense. The big unknown is whether enough investors will step up and offer Bombardier the funds it desperately needs.
For the debt sale, Bombardier was recently downgraded to B+ by Standard & Poor's, and its largest bond outstanding, $1.25-billion due in 2023, currently yields 6.8 per cent. The equivalent Government of Canada bond carries a 1.15 per cent yield.
The company also admits its debt ratios are way too high. At the moment, Bombardier's $7.4-billion in debt outstanding amounts to 6.6 times its earnings before interest, taxes, depreciation and amortization. Even if you use the metric Bombardier favours, which is adjusted debt to adjusted EBITDA, the ratio is still 4.7 times. Bombardier's target is 2.5 times, almost half the current level.
As for equity investors, Bombardier just announced plans to suspend its dividend. That only makes the stock less attractive for new buyers.
Poor performance is an even bigger hurdle. Bombardier hasn't sold common shares since 2003, when it issued $1.2-billion worth of equity. The share price for that sale: $3.25. Today Bombardier's stock trades around $2.70, which means anyone still holding stock from the last sale would be doubling down at an even lower price more than a decade later.
Plus, the debt woes only make it less likely for shareholders to get their money back should Bombardier ever need a full blown financial restructuring. And even though Bombardier says the sale of its assets are being explored "in order to reduce debt," which would help prevent such a restructuring, there is no guarantee they will find buyers willing to step up at prices they'll accept.
On the bright side, there very well could be investors who see $2.70 as an attractive share price for a company that is about to be revamped. Plus, Bombardier is Quebec-based, and there are bound to be some in-province financial institutions that step up to support it. (Hello, Caisse de dépôt et placement du Québec.)
And even though Bombardier will likely have to pay a juicy yield on the debt it issues, that might be attractive to bond investors in a market where government yields pay practically nothing.
As for Bombardier's balance sheet, it had cash and cash equivalents of $2.5-billion at the end of 2014, and the company currently meets all of its financial covenants on existing credit lines. The next debt maturity also doesn't arrive until 2016 when $750-million comes due.
Bombardier has already named potential underwriters for its new issues. National Bank Financial, UBS Securities Canada, CIBC World Markets and Citigroup Global Markets Canada are all in the running to lead the offerings, because they are part of the syndicate that lent money to the company.