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Timing Is King

25 April 2019 by jbchevrel

The Canadian aircraft and train manufacturer Bombardier Inc. (BOMB) came under pressure today, with cash falling (both the C$2.3B of 7.875 27s and the C$1.4B of 7.5 24s came off 2 points, the former went from 103 to 98.75 in the week), and CDS widening (by c75bp on the 5y – 1s5s steepened by c30bp), thus breaking the ~ 350-400bp post-roll range. This is after BOMB lowered its revenue and profit expectations for 2019. 12m forward revenue is now expected to be c$1B less, while EBITDA may drop below guidance range. Thus driving a higher probability to see net leverage north 2x in the near future. A slower than anticipated acceleration in production on key rail projects and the timing of aircraft deliveries are the official cause for the warning. Basically, it seems that BOMB needs to better synchronize supply with demand. An unfavourable FX translation was also mentioned. Punting on FX is arguably a full-time job. What now, though? The pending operational execution is another risk on the horizon, maybe more an issue for the long end than the short end, as the liquidity position looks OK. Indeed, 2019 is still expected to be a strong year for FCF, and the short end is unlikely to be too pressured if BOMB closes the year with more than $18B of cash and liquid marketable securities on its balance sheet. We will probably get more colour on the earnings call, scheduled on May 2nd.