Credit-default swap spreads on Bombardier, a Canadian aviation and rail manufacturer, tightened Wednesday to about 350 basis points from 380bps the previous week, despite a ratings downgrade to junk status with a negative outlook. Bank proprietary desks and hedge funds focused their attention on the five-year market although the 10 and 30-year bonds were also active, said a credit trader.
The rally followed Standard & Poor's downgrading Bombardier to BB after the Montreal-based company reported its third quarter results. A trader said the company's earnings, although lower than expected, were not as bad as some feared. With the rating downgrade now in the past, more traditional high-yield players will re-evaluate their exposure, he said. "If they don't have any exposure, and my guess is they don't, I could see high-yield money being put to work on this name because, on a relative-value basis of BB industrials, Bombardier is rather cheap," he noted in Toronto.
Kenton Freitag, an S&P analyst, said the rating's agency downgraded Bombardier and gave it a negative outlook because it's concerned the U.S. airline sector, already in bad shape, will further deteriorate. In addition, several of the manufacturer's bank lines are maturing next year and this could prompt liquidity problems. "We'll be watching that they'll be able to roll those over," he said. Freitag also cited concerns over Bombardier's ability to achieve stronger margins in the transportation division in mass transport and said the strong Canadian dollar and U.K. pound has worked against the company. "About 60% of its aerospace workforce is in Canada, but its revenues are in U.S. dollars," he said. "That mismatch makes them vulnerable."
