After receiving a $1 billion bailout from the Quebec government earlier last year, it looks like the federal government might step in with another $1 billion cash infusion for Bombardier, Inc. (TSX:BBD.B). According to Reuters, “the Canadian government has finished studying a request from struggling plane maker Bombardier, Inc. for $1 billion in aid and is preparing to make an announcement within weeks.”
The bailout is mostly to help plug a financing hole created by the company’s money-losing CSeries jet. If a bailout is agreed upon, sources say shareholders could be relieved of the project entirely.
Ditching the project would be huge
Bank of Nova Scotia speculated last week that if a bailout is approved, the CSeries jet program will likely be spun out into a separate entity that’s split evenly between the company and the two levels of government. This could turn Bombardier from a bankruptcy candidate into a viable business.
According to the U.S. aviation consultancy firm Leeham Co., Bombardier will lose $32 million on each of the first 50 CSeries aircraft it builds, guaranteeing the project as a cash drain until at least 2018. To afford ramping up production, the company would need to spend approximately $1.6 billion.
Even with optimistic assumptions, Bombardier management believes that it requires $2 billion in additional financing over the next five years to complete the CSeries project. Bombardier simply does not have this kind of capital. Currently, the firm has $9 billion in debt and only $3 billion in cash.
Spinning out the program into a separate entity could be a deal-maker for Bombardier’s future. Moody’s Corporation downgraded the company’s credit rating last summer, leaving asset sales or government bailouts the only feasible options to raising capital.
On the latest conference call, CEO Alain Bellemare explained that post-CSeries, the company could “regain earnings, improve margins, and be in a position to start paying down debt starting in 2018.”
Putting on a brave face
Persuading the federal government to pour $1 billion into the company’s greatest product failure will take some work. The company leaked that it was in talks with potential buyers, including United Continental Holdings Inc., after winning a $3.8 billion order from Air Canada.
“The competition has been fierce but the fact is, CSeries is a reality,” said Colin Bole, senior vice president for sales and asset management at Bombardier.
Still, it was its first order in 16 months, and the first from a major carrier since 2011.
Management will continue to trump the viability of the project, but without another government bailout, the project simply cannot move forward. Unfortunately, Reuters recently reported that senior government officials “did not like the way the $1 billion Quebec deal had been structured.”
Even if Bombardier survives, that doesn’t mean it will be on terms that will benefit current shareholders.