Reuters
US CREDIT-Bombardier likely headed to junk by Moody's
Monday August 30, 9:34 pm ET
By Eric Burroughs
NEW YORK, Aug 30 (Reuters) - For struggling aircraft and rail car maker Bombardier, last week's earnings results for its second quarter offered a rare relief to credit investors used to negative surprises every three months.
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http://us.ard.yahoo.com/SIG=1269tut...http://www.gftforex.com/land/index.asp?aid=54But thanks to Moody's Investors Service (News - Websites) , the relief proved short-lived after the ratings agency still threatened to cut the ratings into junk territory.
After Bombardier (Toronto:BBDa.TO - News) reported increased cash, reduced debt and a slight profit, the company's credit spreads rallied on hopes that some of the market's worst fears were overblown. The Moody's ratings threat quickly changed that, even as other ratings agency were somewhat sanguine.
For most of the summer, Bombardier's standard five-year spread in the credit derivatives market has traded at levels similar to companies with ratings already well into junk territory. And traders generally say the outlook remains very uncertain.
Bombardier is facing the likelihood of plane order delays and shrinking production as two major customers appear on the verge of declaring bankruptcy -- Delta Airlines (NYSE:DAL - News) and US Airways (NasdaqNM:UAIR - News). For US Airways it would be the second bankruptcy in two years.
At the same time, the company is attempting to develop a new, 100-plus seat plane to meet the preferences of the profitable low-cost airlines, with orders declining for its current low-seat plane offerings. A plan for making a new plane is expected to be unveiled at the beginning of 2005.
Even as Fitch Ratings (News) mostly accentuated the positives of Bombardier's current balance sheet, it laid out the risks that have investors worried: declining backlog orders and potential production cuts for its smaller plane line, intense competition from Brazil's Embraer, the heavy investment for the new aircraft, the weak aircraft financing market and the problems at the big airlines.
Moody's made it clear to some that a junk rating is all but a done deal, pointing out in the release that the company's $4.4 billion of cash and bank lines is "adequate" to offset any money it will have to pony up to some lenders if it is cut to junk.
Moody's rates Bombardier Baa3, at the edge of junk, with a negative outlook. Standard & Poor's rates the company similarly at BBB-minus with a negative outlook, while Fitch Ratings places it at BBB-minus with a stable outlook.
Analysts at Banc of America Securities (News - Websites) said the wording "implies it's essentially a done deal," and most traders agreed. One corporate bond trader at a U.S. investment bank said a cut to junk "is pretty much what they insinuated in the release."
In the credit derivatives market, Bombardier's five-year spreads trade around 485 basis points, or $485,000 a year for $10 million of default protection. By comparison, a recent new entry in the junk category, AT&T, trades at 300 basis points.
Bombardier's spread has more than quadrupled this year. As one credit analyst put it, the market has already "priced in significant downside in the credit." For that reason, Banc of America maintained its "buy" recommendation for the company's credit derivatives and bonds for accounts seeking names with higher returns and those willing to bear the tumultuous ups and downs from negative headlines and ratings actions.
US CREDIT-Bombardier likely headed to junk by Moody's
Monday August 30, 9:34 pm ET
By Eric Burroughs
NEW YORK, Aug 30 (Reuters) - For struggling aircraft and rail car maker Bombardier, last week's earnings results for its second quarter offered a rare relief to credit investors used to negative surprises every three months.
[size=-2]ADVERTISEMENT[/size]
http://us.ard.yahoo.com/SIG=1269tut...http://www.gftforex.com/land/index.asp?aid=54But thanks to Moody's Investors Service (News - Websites) , the relief proved short-lived after the ratings agency still threatened to cut the ratings into junk territory.
After Bombardier (Toronto:BBDa.TO - News) reported increased cash, reduced debt and a slight profit, the company's credit spreads rallied on hopes that some of the market's worst fears were overblown. The Moody's ratings threat quickly changed that, even as other ratings agency were somewhat sanguine.
For most of the summer, Bombardier's standard five-year spread in the credit derivatives market has traded at levels similar to companies with ratings already well into junk territory. And traders generally say the outlook remains very uncertain.
Bombardier is facing the likelihood of plane order delays and shrinking production as two major customers appear on the verge of declaring bankruptcy -- Delta Airlines (NYSE:DAL - News) and US Airways (NasdaqNM:UAIR - News). For US Airways it would be the second bankruptcy in two years.
At the same time, the company is attempting to develop a new, 100-plus seat plane to meet the preferences of the profitable low-cost airlines, with orders declining for its current low-seat plane offerings. A plan for making a new plane is expected to be unveiled at the beginning of 2005.
Even as Fitch Ratings (News) mostly accentuated the positives of Bombardier's current balance sheet, it laid out the risks that have investors worried: declining backlog orders and potential production cuts for its smaller plane line, intense competition from Brazil's Embraer, the heavy investment for the new aircraft, the weak aircraft financing market and the problems at the big airlines.
Moody's made it clear to some that a junk rating is all but a done deal, pointing out in the release that the company's $4.4 billion of cash and bank lines is "adequate" to offset any money it will have to pony up to some lenders if it is cut to junk.
Moody's rates Bombardier Baa3, at the edge of junk, with a negative outlook. Standard & Poor's rates the company similarly at BBB-minus with a negative outlook, while Fitch Ratings places it at BBB-minus with a stable outlook.
Analysts at Banc of America Securities (News - Websites) said the wording "implies it's essentially a done deal," and most traders agreed. One corporate bond trader at a U.S. investment bank said a cut to junk "is pretty much what they insinuated in the release."
In the credit derivatives market, Bombardier's five-year spreads trade around 485 basis points, or $485,000 a year for $10 million of default protection. By comparison, a recent new entry in the junk category, AT&T, trades at 300 basis points.
Bombardier's spread has more than quadrupled this year. As one credit analyst put it, the market has already "priced in significant downside in the credit." For that reason, Banc of America maintained its "buy" recommendation for the company's credit derivatives and bonds for accounts seeking names with higher returns and those willing to bear the tumultuous ups and downs from negative headlines and ratings actions.
