Bombardier near financing deal, with boost from Quebec

$1.4B to$1.7B pact will aid balance sheet, fuel jet sales

MONTREAL • Bombardier Inc. is within days of closing a crucial US$1.4-billion to US$1.7-billion aircraft financing deal that will free up its balance sheet and allow it to sell more regional jets. The deal appears to have received a late boost thanks to extra aid from the Quebec government and, surprisingly, Delta Air Lines Inc.’ s bankruptcy.

Bombardier has been working since 2004 to put together permanent financing for 70 regional jet and turbopropeller-powered airliners it delivered to airlines.

Bombardier not only makes planes but also finds financing for its customers, who prefer to pay leases rather than carry the assets on their books. The company’s capital arm initially provides interim financing before installing third-party financiers to cover the cost of the planes. That has become more challenging because of the airline industry’s financial woes.

Bombardier arranged more than US$ 3- billion in financing for its airline customers in each of the past three years. Much of that has been taken up by the federal Crown corporation Export Development Canada, which says it is owed US$3.7-billion by bankrupt Delta and Northwest Airlines Corp. for financing their Bombardier jet purchases.

“In regional jet sales today the single biggest hurdle we face is closing on permanent financing for our customers,” said John Paul Macdonald, Bombardier’s spokesman.

Last month, Pierre Alary, the company’s chief financial officer, acknowledged the permanent financing deal — one of the largest the company has arranged — had been delayed, but maintained it would close by the end of September. Because of the delay, Bombardier’s books remained overburdened at the end of the second quarter, leading to a US$500-million drop in free cash flow and forcing the company to exceed its self-imposed limit of US$1-billion of interim financing. Analysts speculate the lack of room for more financing may be why it hasn’t announced new orders recently.

According to documents obtained by the Financial Post, terms of the deal have changed significantly since late spring. The basic structure involved a special purpose trust (55% owned by underwriter Wachovia Securities, 45% by Bombardier) buying, leasing or owning 70 recently delivered regional jets and turbopropeller planes. The trust was to be chopped into two classes of securities — certificates and notes — and sold to large investors, which would get cash as lease payments rolled in.

The certificates would carry a lower return but also a lower risk, as holders were to be paid first from the lease revenues. Holders of the notes would earn a higher return, but get paid last, so the risk was higher.

Under the original terms, the 70 planes represented deliveries to five U.S. and two “international” airlines. The trust was to sell US$1.24-billion worth of certificates and US$260-million worth of notes, the latter guaranteed by Investissement Quebec, the province’s investing arm, should collections fall short from the airlines.

But according to a Sept. 4 “ presale report” on the deal by Moody’s Investor Service, Quebec has substantially increased its exposure. It is now guaranteeing US$485-million worth of notes, while the certificates offering (guaranteed by MBIA Insurance Corp.) has shrunk to US$905- million. Industry journal Structured Finance Watch also recently indicated another US$275-million of certificates may also be sold.

In addition, just four airlines now account for the 70 planes in the deal — Air Canada ( 18 regional jets), U.S. regional airlines SkyWest (32 RJs) and Mesa (15 RJs) and Britain’s FlyBe, with five turboprops. Delta’s decision to sell its regional feeder service Atlantic Southeast to SkyWest last month — to raise funds before it went into bankruptcy — likely took Delta out of the securitization and landed more Skywest planes in the deal, analysts say. That likely increased the offering’s attractiveness to investors, as Skywest is relatively healthy.

Meanwhile, Bombardier received troubling news yesterday, as Delta said it plans to reduce the number of Bombardier regional jets in the fleet of its feeder service, Comair. That could lead to an increase in 50-seat jets on the used market, driving down prices.

Financial Post ssilcoff@ mon. nationalpost. com