CASH INFUSION
Quebec’s biggest pension fund puts up $1.5 billion for stake in Bombardier’s rail division,
After a global search for an investor in its rail division, in the end Bombardier Inc. stayed close to home, turning to Quebec’s biggest pension fund for a $1.5-billion (U.S.) cash infusion.
In exchange for the money, the Caisse de dépôts et placement du Quebec gets a say in board members as well as the promise of at least 9.5-per-cent annual returns for its 30-per-cent stake in a new holding company known as BT Holdco.
If Bombardier Transportation doesn’t deliver, then the Caisse can increase its stake to as much as 42.5 per cent over the next five years. If the company delivers better returns, then the Caisse can reduce its stake.
Caisse CEO Michael Sabia touted the arrangement, which values the company at $5 billion, as giving its depositors “bond-like” protection but with the “upside” of equity.
Bombardier has the option to buy out the Caisse at the end of three years, with guaranteed returns of a minimum 15 per cent, on an annual compound basis. Sabia called that 15-per-cent rate very attractive, but said he hopes the pension fund isn’t bought out at that point.
“We think the transportation business has a lot of interesting potential,” said Sabia during a conference call on Thursday. “Bombardier Transportation is already a global champion. I think it can be an even bigger and stronger one.”
That’s especially true because of demand in emerging markets like Asia and Latin America, he added.
“Obviously, there’s still a lot of work to do. That’s no secret,” Sabia said.
Bombardier’s Class B shares, which are down almost 70 per cent year to date, closed unchanged on Thursday at $1.28 (Canadian).
The Toronto Transit Commission is furious with Bombardier over its long-delayed streetcar order, first placed in 2009. To date, the TTC only has 11 streetcars, with another en route from Thunder Bay.
Originally, 73 were supposed be in use by the end of 2015, but the schedule was revised to 20, which Bombardier says will only be 16. In December, the TTC is expected to file a notice of complaint, seeking $50 million in damages over the delay.
The investment by Caisse comes on the heels of a $1-billion (U.S.) commitment from the Quebec government for a 49.5per-cent stake in Bombardier’s struggling CSeries program.
Development of the CSeries program is years behind schedule and billions over budget, but the flight testing is now complete. The company expects certification soon. However, sales for the all-new plane, in two sizes, have been sluggish with only 243 firm orders to date — and none in a year.
Porter Airlines, which has placed a conditional order for 12 planes, and options for another 18, will not be allowed to fly the jets from Toronto’s island airport, now that the Liberals have taken power in Ottawa.
As Bombardier has burned through cash to get the CSeries launched, it has had to make substantial job cuts and shelved plans for the Learjet85. Earlier this year, Bombardier raised $3 billion through a debt and equity offering.
With the Quebec investment and the deal with Caisse, which is scheduled to close in the first quarter of 2016, Bombardier estimates it will have access to $6 billion in cash and cash equivalents by year’s end.
As a condition of the Caisse deal, Bombardier must ensure there is always $1.25 billion in liquidity. Sabia said the Caisse never considered investing in the CSeries program, instead choosing instead the train division.
Bombardier’s CEO Alain Bellemare says the company has plenty of cash to complete all its programs including the CSeries jet and new Global 7000/8000 business jets. It also provides a cushion in case market conditions prove difficult, Bellemare told reporters on Thursday. “We now have ‘a safety net,’ ” he said. “We will also re-establish confidence with our clients which is key if we want to continue selling our products.”
On the third-quarter conference call in October, Bellemare said an additional $2billion investment would be needed for the CSeries program in the coming years, given it is not expected to get to profitability before 2020 or 2021.
While Quebec has called on the federal government to join in with a cash infusion, the new Liberal government hasn’t acted yet. Bellemare said the company is continuing talks with the federal government.