Bombardier vs. Boeing

Just like most (but not all) of the financial community, I was not expecting the USA trade panel to vote 4-0 in favour of Bombardier.

The immediate implication here is that Boeing, by its actions, has pushed Bombardier into Airbus’ arms, and Airbus is obviously more capitalized and equipped to handle Boeing. By forcing the trade issue, they’ve allowed Airbus to take control of a superior product, which Airbus has a strategic interest in proliferating.

Suffice to say, Bombardier’s stock price is up today, but more relevant for myself, I will be holding onto their preferred shares.

17 thoughts on “Bombardier vs. Boeing”

  1. I’m sorry, but can you summarize the situation with their preferreds? These are par $25 CAD preferreds trading around $4?

    What’s your credit analysis of those after this ruling?

  2. Yahoo is quoting symbol BBD-B.TO at $3.6

    Google is quoting symbol TSE:BBD-B at $11.98

    Not sure what is going on there.

  3. BBD-PB is floating rate, $25 par value, the rate is (very roughly paraphrasing) prime, can convert to BBD-PD every 5 years (next up in 4 years)
    BBD-PC is fixed, 6.25%, $25 par value, but BBD can convert into shares of greater of $2 or 95% of TSX market at any time.
    BBD-PD is fixed, currently 3.983%, $25 par value, can convert to BBD-PB every 5 years (next up in 4 years), the rate is set some time before conversion so you can pick your poison.

    $3.60 seems to be the accurate quotation for the class B common shares. Class A shares are multiple-voting and the controlling family has a lock on the board with that class.

    The google quote seems to be the preferred B shares (floating).

    My credit analysis after the ruling, using a relative ranking, is “greatly improved”. Getting access to the USA in the regional side of things is going to be huge. Much easier to do that when you don’t have your product with a 300% tariff on it. The preferred shares should be able to continue to pay out for a long time until Bombardier management screws up again – but it won’t be for at least a few years.

  4. @Sacha

    Has there been a meaningful improvement in credit spreads on the BBD debt? I haven’t kept up to speed with them but I still own the Ds.

    By the way, shocked to see the GCM.DB.Vs tick above 100 while the GCM.DB.Xs traded below 100!

  5. What’s the background story on Gran Colombia? Their equity has been smashed, but that in combination with improving bond credits usually clues me that equity might see improvements soon. Is it pure exploration?

  6. P One

    Briefly,

    Gran Colombia is producing, likely to be close to or exceeding 200,000 ounces in 2018.

    The debt is all convertible debentures. There have been a few overhangs on the stock that are mostly cleared up now:

    – A lot of illegal miners were mining on their projects and often going on strike. GCM has a deal worked out that should be beneficial for both parties for years to come.
    – Colombia was seen as a tough jurisdiction to do business. You’ll have to evaluate the country risk yourself, but I’m comfortable with it.
    – The debt. Maturities have been extended, can be converted to shares.
    – You’d have to do some digging but there have been some poor decisions by management in the past.
    – A few other cockroaches

    But as of now the company is a low cost producer, generating lots of cash flow, trading at somewhere around 2.5x EV/EBITDA. Peers trade a lot higher.

  7. @Tyler Good summary!

    I would add that a lot of gold investors look at the potential dilution (the stock is only 10% away from the conversion price) and decide its uninvestable. But another way to look at valuation is that based on the current gold price, the company could do around US$1/share in EBITDA on a fully diluted basis vs the current share price around US$1.80. So even if fully diluted it’s dirt cheap.

    Plus it’s rare to find a gold stock with so much free cash flow and a contractual obligation to use the free cash flow to buy back convertible debt. I think the company could end up redeeming US$20m of debt this year which will effectively reduce the fully diluted share count by more than 10% thus creating significant accretion for shareholders.

    I mostly own the GCM.DB.X but own some common as well.

  8. @Safety: Forgot to answer this. On the US-BBD trade panel announcement, BBD’s bonds tightened about 50bps.

    I would think the V’s and X’s will trade lock-step as the common approaches conversion price, with the exception that the V’s will get chipped away with those redemptions at par. Still, GCM is going to fall somewhat short cash-wise before the January 2020 date, so it would not surprise me if there was an extension proposal coming some time in 2019. Covenant-wise they’re somewhat restricted in terms of bank debt since the debentures are already secured by the assets (going by memory here) and they cannot create something pari-passu without consent.

  9. On the Gran Colombia debentures, do the 2020 and 2024 debentures have any kind of cap on the upside if the stock trades well north of the conversion price? Some debentures have a 125% provision that limits your upside as they force conversion to stock if the stock trades for 90 days at 125% or higher of the conversion price.

    If you wanted full exposure to upside of the equity, I suppose the 2024 would be the better instrument since that will not get buybacks? From what I read the 2020 fall ahead of 2024, so in a liquidation the 2020s will get at least partial recovery and the 2024s will probably not do so well?

    It’s unusual to see a small producer of gold with so much free cash flow. How are they getting the extraction costs low enough to do this? What is the projection for mine life, and realistically how long can we expect the free cash flow to continue at these levels, assuming gold price does not deteriorate?

  10. I don’t think those kind of clauses exist for these – option to convert to shares is strictly on the holder (no force redemption with shares allowed). I believe the X & V are parsi passu in the event of bankruptcy / restructure – just that the sinking fund must be used to redeem V first.

  11. @Sacha – Things have to go on plan but I think they will be able to redeem all of the V debentures by 2020. Obviously the gold price has to be north of say $1300 and they can’t have too many production interruptions. If that happens, then FCF generation should accelerate in 2018 and 2019. The combination of not having supplement working capital balances like they did the last two years and the decline in the tax rate should do the trick. A lot of the capex they are doing is discretionary as well and they could cut that or reschedule if they had to in order to avoid having to extend the 2020 debentures.

    Of course, if the stock price gets above conversion price, and they announce a partial redemption, some debenture holders may choose to hedge and convert and not lose money on a partial redemption at par.

  12. @Sacha Perhaps it’s a moot point if GCM is successful on this financing. I would love to see the term sheet on this one. The coupon and number of warrants/strike is of utmost importance to equity holders.

  13. @Safety: Devil is in the details on the offering for sure! Coupon? Maturity? Subordination? Conversion? Warrant strike? Warrant term? Inquiring minds want to know!

  14. @Safety: GCM’s refinancing proposal had to have been the most ill-timed in history (in relation to what happened in the US broad markets that day).

    It’s not entirely clear what will come out of this – also, it requires a bit of fine-comb reading of the GCM.DB.V indenture to see what is possible. My take is that 5.09 does allow for a scenario where the U’s get refinanced and the V’s and X’s remain intact.

    A material question then becomes the option value of the V’s and X’s, which then suddenly have limited value. GCM is obviously trying to wiggle away from their covenants – will they find people to invest US$150 million into this thing to allow them to wipe it all out? I’d love to know what terms are being proposed.

  15. If they get better terms on the debt and warrants than what’s currently outstanding with the debt, then obviously it would be.

    But the devil here are the terms.

    1. Terms of the gold-linked notes – security, coupon, term, convertibility?
    2. Terms of the warrants – how many, strike price, term?

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