Bombardier Bailout, part 2

Today’s big news is that Bombardier is selling 30% of its transportation division to the Quebec Pension Plan (CDPQ) for $1.5 billion.

The quick analysis is the following:

1. BBD will have received a cash injection of US$2.5 billion as a result of selling 49% of its C-Series aircraft interest and 30% of its transportation division; this will alleviate any short-term solvency concerns (from the September 30, 2015 balance sheet, they will have over CAD$5 billion liquidity to deal with). This capital is obtained with zero interest cost and some potential dilution of shareholders if the common share price ever gets above the US$1.66 exercise point (which one would hope it does in the recovery scenario!). Near-term bond yields (2018 maturities) are trading at 6.8%, while mid-range debt (2022 maturity range) is between 10-11%. The market is still skeptical of the financial recovery of the corporation.
2. BBD issues another 106 million warrants at an exercise price of US$1.66 on their subordinate voting shares. This is in addition to the 200 million they issued with the previously announce US$1 billion investment from the Quebec government.
3. BBD is required to maintain a cash balance of US$1.25 billion otherwise control on the board will start to erode.
4. This will save BBD from the hassle of doing an IPO (i.e. going through a regulatory quiet period, doing an institutional investor road-show, etc.), but noting that the CDPQ will have rights to trigger an IPO after 5 years of investment. CDPQ will also have significant minority shareholder rights.
5. If the Government of Canada wishes to tag along with some sort of contingent financing offer or backstop, BBD is in a considerably better position to negotiate as they will have sufficient financial reserves to do so.

I view this generally as a positive for the corporation, although they will still need to execute on getting the C-Series jet out the door and be able to generate sales. However, they seemed to have tackled the immediate perception issue of financial trouble, and have shown the financial world that the Quebec government will do whatever it takes to ensure Bombardier’s survival. If the Government of Canada chips in some cash, it will be icing on the cake.

My assessment of the preferred shares is still the same – they will likely pay dividends for the foreseeable future. At CAD$6/share, BBD.PR.B gives off a 11.25% yield, while BBD.PR.C is sitting at around 16%, with the risk that they’ll be force-converted to 12.5 shares of BBD.B – something I doubt management will do, but financially speaking it would make sense to issue 118 million shares to save CAD$14.7 million/year cash flow – with the way they are treating their equity holders, they might as well eliminate this headache off the books. This is the most likely reason why there is such a yield spread between the preferred share series.