Tag: BBD

Why people would be long-term investors in this company’s common shares is beyond me. It is, however, a good speculation vehicle on government bailouts, of which I cashed in on about four years ago when the Liberals took control of government.

Bombardier common shares (TSX: BBD.B) are trading down 32% today on the news their quarterly results are not going to be as good as expected. In fact, this is somewhat of an understatement as they just threw everything bad into the release. Transportation is performing very badly, and a couple key quotations:

Consolidated free cash flow for the fourth quarter is estimated at approximately $1.0 billion, approximately $650 million lower than anticipated.

Oops.

While the A220 program continues to win in the marketplace and demonstrate its value to airlines, the latest indications of the financial plan from ACLP calls for additional cash investments to support production ramp-up, pushes out the break-even timeline, and generates a lower return over the life of the program. This may significantly impact the joint venture value. Bombardier will disclose the amount of any write-down when we complete our analysis and report our final fourth quarter and 2019 financial results.

The “call option” embedded in Bombardier’s disposal of its participation in the C-Series aircraft is increasingly looking like to come to a (metaphorical, not literal) zero. The agreement with Airbus required cash injections up to a ceiling and it looks like this threshold will be reached. While the minority stake Bombardier has will still have some value (especially as Airbus eventually gets around to selling the aircraft, which by all accounts, are superior) it isn’t anything like what they anticipated a decade ago when getting into the market, which is a real shame.

And on the issue of their capital structure (which is getting quite debt-heavy in relation to their cash flows):

The final step in our turnaround is to de-lever and solve our capital structure. We are actively pursuing alternatives that would allow us to accelerate our debt paydown.

Easier said than done. With their market cap under CAD$3 billion, any de-leveraging through common share issuances are going to be highly dilutive and not make too much of a dent on their US$9.3 billion debt (as of September 30, 2019). They are pursing asset sales to inject a billion into the balance sheet, but Bombardier is clearly running out of options. They’ve gotten rid of their commercial aircraft division, and 30% of their transportation division, so there isn’t much left. “solve our capital structure” is a code-word for a “light recapitalization”, which would explain the common stock tanking today.

It has been awhile since I reviewed Bombardier’s debt maturity curve and I’ll show a snapshot of my trading console and also a yield-to-maturity graph that I have been keeping of the company. The thick line is the present yield to maturity of their debt and despite today’s news, doesn’t appear to be too catastrophic (yet):

Bombardier can still likely raise debt financing, albeit more expensive today than it was yesterday (when most of their bond issues were trading at above par).

The preferred shares (TSX: BBD.PR.B, BBD.PR.D) also took a dive, and are now trading at around an 11% yield for those that like to gamble. Just be warned that “alternatives to allow accelerating our debt paydown” might include the suspension of preferred share dividends (suffice to say, this would likely result in lower prices for the preferred shares). An interesting gamble for yield chasers!

Bombardier is the company that just keeps on giving scandal after scandal after scandal. I had reported on their Q2-2018 results that things were finally on the upside, the C-series disposition from Airbus was proceeding and hence the cash drain would abate, and they could finally look forward to subsequent cash generation. I expressed that all was well.

Nope!

Their Q3-2018 quarterly report wasn’t a complete disaster (but make no mistake: it was a significant deviation from what management was projecting in the previous few quarters), but the market subsequently annihilated everything – shares are down 64% since the beginning of the quarter. Preferred shares are down about 25%. Bond yields are up about 350bps (January 2023s, 6.125% coupon, went from par to about 90 cents on the dollar). I have not seen this amount of market carnage as a reaction to a quarterly report in quite some time.

Then Bombardier announced that the Quebec Securities Commission (Autorité des marchés financiers) will be investigating them for insider trading relating to their automatic share disposition plan. I’m rather ashamed to admit I knew more about the USA version of this (SEC Regulation 10b5-1) compared to the Canadian securities regulations, where Ted Dixon (owner of CanadianInsider.com) writes a very educational article on the matter.

This added further fuel to the selling fire – what the heck did Bombardier executives know on August 15, 2018 that was likely coming down the pipeline? What sort of institutional manager would want to be caught holding shares in such a dysfunctional organization, potentially with unethical executives that were trying to unload their shares at nearly the top? Everybody rushed to the exits and the consequences are pretty obvious.

There are a few reasons why the quarterly report was perceived as horrible other than the inside trading scandal. Indeed, one could infer from the stock price since October that outsider groups knew what the heck was going on.

One is that while the company is reporting profit from an accounting perspective ($149 net income for the quarter!), it is burning cash like no tomorrow:

Bombardier’s balance sheet is not in good shape either – while they do have sufficient cash to work with in the next year, their debt maturity profile is looming – US$850 million due March 2020 (this is just 16 months away!) and $2.3 billion in 2021. They will need to become cash positive in order to be able to give the market enough confidence to roll over the debt. In light of them selling off business divisions, it leads one to wonder what is going to be left that will be able to produce such cash.

Finally, what likely set the market most off is this paragraph:

Bombardier is targeting to achieve free cash flow generation in the range of $250 million to $500 million, which is anticipated to be offset by the $250 million restructuring charge mentioned above, as well as a $250 million contingency to reflect the working capital volatility as the Company progresses through its intense growth phase at Business Aircraft and Transportation. Accordingly, free cash flow guidance for 2019 is targeting breakeven plus or minus $250 million.

The market was anticipating a free cash flow generation without any major asset sales, or any “contingency” for “working capital volatility”, or especially any “restructuring charges”. When reading their management discussion and analysis piece, the references to “EBIT minus special items” becomes quite redundant and the market is quite tired of seeing “special items” becoming simply recurring features of the financial statements (which doesn’t make such special items so special – they represent actual costs of business).

What is left of Bombardier (looking at 9 months, ended September 30, 2018 financials):

Business Aircraft – $356 million EBITDA, spent $617 million in capitalized expenses (net these two – this is a $261 million cash burn) – can they actually turn this around and make money?

Commercial Aircraft – Divested the Q-series Turboprops, and sold the C-Series to Airbus – Bombardier is still on the hook for liabilities from the C-Series in 2019 (i.e. a cash burn).

Here is the schedule of payments for the C-Series disposition:

Bombardier will fund the cash shortfalls of CSALP, if required, during the second half of 2018, up to a maximum of $225 million; during 2019, up to a maximum of $350 million; and up to a maximum aggregate amount of $350 million over the following two years, the whole in consideration for non-voting units of CSALP with cumulative annual dividends of 2%. Any excess shortfall during such periods will be shared proportionately amongst the Corporation, Airbus and IQ, but in the latter case, at its discretion. As of September 30, 2018, the Corporation invested $85 million in CSALP in exchange for non-voting units of CSALP. Subsequent to the closing, Airbus rebranded the C Series aircraft as A220.

An $85 million cash drain in the first 9 months of 2018, if repeated in 2019, will result in another $113 million cash going out the window. Is the C-Series going to make money? Wikipedia generally has very good reporting of various aircraft purchase orders (Airbus A220 orders, Boeing 737 MAX orders).

Transportation – $613 million EBITDA, spent $107 in PP&E and intangibles (which I had to manually add from 3 quarterly reports – they don’t give you this number cleanly) – which is a $506 million cash inflow – the only profitable cash source the company has right now.

Complicating matters is that Bombardier sold 30% of their transportation division to the Caisse de dépôt et placement du Québec (for $1.5 billion), but it has an embedded call provision where Bombardier can repurchase its share back in 2019 at a minimum 15% return for the CDPQ. Where will they get the cash?

Before, the solution was obvious – float another bond offering, but this market is now on the cusp of being prohibitively expensive:

The near maturity is still at par (roughly 7.75%) but going further on the term structure is going to cost Bombardier significantly – if they decide to do this, it will have to be a secured bond offering.

If you can believe anything management says anymore, they claim 2020 will have $750 to $1,000 million in free cash flow. On the low end of this range would make it about 35 cents per share (noting they have a bunch of warrants outstanding to buy Class B shares at $2.21/share which are no longer in the money). If they can achieve this FCF forecast, then they look awfully cheap.

Of course, the market doesn’t believe them. I don’t either. I do think they will muddle their way through this, as they always have.

The real issue, to summarize, is that Bombardier is facing a classic liquidity vs. solvency problem – they could use a couple billion dollars right now, but can’t find any cheap sources of it other than doing these asset sales (Q-series jets, their aircraft training unit, etc.). They have always seemed to be on the verge of generating cash, just like Charlie Brown being able to kick the football.

Financially, looking at their preferred shares – BBD.PR.B is trading at 9.6% (noting that if you believe the Bank of Canada will raise rates another 0.25% it is a slightly better bargain), BBD.PR.D is trading at 10.0% and BBD.PR.C is trading at 9.2% (implying slightly that the company will exercise its conversion rights and redeem the preferred shares for stock, which at their current share price will be 12.5 shares of BBD.B per preferred share). There is a very real risk, however, that Bombardier will find itself out of cash and this would result in a suspension of preferred share dividends. This obviously would not be good for preferred share prices, nor would it bode well for the company’s ability to refinance debt. A yield-focussed investor could also get 8.8% on the December 2021 bond issue (8.75% coupon, trading at 99 cents on the dollar) and not worry about a dividend suspension (albeit this is interest income and not eligible dividend income which has a tax impact).

I hold a small amount of BBD.PR.C shares which I picked up back in early 2016 when they were trading at yields in the teens. I did unload some at higher prices in 2017. I did not think I would see them trade like this again, but here we are again.

December 6 will also be Bombardier’s “investor day”, and you can be sure management will try to promise the skies once again and assure investors that the entity will generate cash.

As this catastrophe is hitting the company at the end of the year, there is going to be a lot of window dressing and tax loss selling of the stock. I can just imagine how somebody having a heavy equity holding of this feels at the moment – disgust. Fortunately my position in the preferred shares were minimal, but it still doesn’t feel good to see this much capital evaporate at once.

Bombardier reported their quarterly results today. They’re slowly digging themselves from the financial gravesite a couple years ago – reporting $70 million in accounting profits, and that makes $114 million for the half. This doesn’t quite translate into cash positive results, but they should achieve cash flow positivity in 2019 and beyond, once all of the C-series related expenditures are consumed and happily handed to Airbus. This will not include the half billion injection they will receive whenever the outstanding warrants are exercised (not likely until closer to expiration – but they’re deeply in the money at present).

Management will probably use some of that capital to slightly de-leverage but after that they have options, including the re-initiation of a very small common stock dividend (they have diluted their common equity considerably over the past couple years).

Their preferred shares trade at a yield between 670 and 730 basis points and are likely to continue paying off into the indefinite future. I will be holding onto mine.

It has been awhile since I’ve posted the progression of the Bombardier debt yield curve, but clearly things have stabilized at the investment grade quality level:

The corporation itself has also raised half a billion (US$) in an equity offering, and has warrants outstanding to purchase shares of its class B stock which are now well within the money. This will be another CAD$500 million that will go to their treasury when it is exercised. Solvency-wise, the company looks like it is once again on stable footing now that the liabilities associated with the C-Series jet has been dumped off to Airbus.

I will likely discontinue my Divestor coverage of Bombardier after this post. The story is over. A few years ago, people were selling down their preferred shares to ridiculously high yields (22%) on the premise that they were not going to be able to stay solvent while they financed their C-Series jet. This was a classic time to capitalize on the cascade of emotional negative sentiment towards the corporation. I even got a media mention for this.

I’m still holding onto my Bombardier preferred shares, although strictly from a valuation perspective, I would not be buying them at the existing price. However, due to the unrealized capital gain and the fact that I have nothing else better to invest my cash with, I will be holding my holdings indefinitely.