Mon 12/07/2020 14:00 PM
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Canadian business jet and train manufacturer Bombardier and French transportation group Alstom announced last week that all regulatory approvals have now been received for the sale of the Bombardier Transportation business to Alstom. The sale is expected to generate net proceeds for Bombardier of about $4 billion, including $585 million worth of Alstom shares, which are subject to a three-month lockup. Continue reading for the EMEA Covenants team's analysis of  a potential sale of Bombardier Transportation to Alstom, and request a trial to access legal analyses of many more mergers and acquisitions.

As previously reported, Bombardier has the flexibility under its outstanding bonds to use the proceeds of the asset sale at management’s discretion. However, it seems part of the proceeds is required to be used to pay down new secured debt that the company incurred over the summer.

Net proceeds to Bombardier were reduced from the initial estimate of between $4.2 billion to $4.5 billion partly because investor CDPQ (Caisse de dépôt et placement du Québec) invested an additional €350 million (about $386 million) via new convertible shares to support liquidity in the Covid-19 crisis and consequently is entitled to a greater share of the proceeds. Prior to this investment, the Canadian pension fund’s preferred equity holding of convertible shares corresponded to a potential 32.5% ownership in Bombardier Transportation, which increased to 36.34% as a result of the equity injection. When announcing the transaction with Alstom, the two partners agreed to retire CDPQ’s preferred equity holding in the business.

Bombardier’s expected proceeds from the transaction are summarized below:

Bombardier is required to use net proceeds from the asset sale to pay down 50% of the outstanding principal amount under Bombardier’s new secured term loan of up to $1 billion provided by HPS Investment Partners in July. As of Sept. 30, $750 million was outstanding. The remaining net proceeds are to be used for deleveraging, according to the company.

The HPS facility is secured against certain aviation inventory and related accounts receivable. The negative pledge, or liens covenant, in Bombardier’s outstanding bonds prohibits the group and its subsidiaries from granting a security interest on assets unless the existing bonds are equally and ratably secured. However, based on the offering memoranda we reviewed, the negative pledge contains an exception for a security interest created in the ordinary course over stock-in-trade, inventory, accounts receivable or deposit accounts. This exception is likely to have been utilized to incur the new secured term loan. We note the offering memoranda available for review in our previous report highlighting that Bombardier’s existing bonds contain limited restrictive covenants and do not include a restriction on debt incurrence.

Bombardier’s management stated at the beginning of 2020 that it would engage in asset disposals to improve liquidity and deleverage. The sale of Bombardier Transportation was announced in February prior to the global pandemic caused by Covid-19.

As a result of Canadian government measures to fight Covid-19 in March, Bombardier suspended work in most of its Canada-based operations for one month and also suspended its 2020 financial outlook. Bombardier’s results for the first two quarters of 2020, particularly free cash flow, were negatively impacted by the Covid-19 outbreak but over the summer Alstom issued a release confirming its commitment to the acquisition of Bombardier Transportation.

By September, when the definitive sale and purchase agreement for the sale of the transportation business was signed, the enterprise value of the asset was reduced to €7.15 billion, €300 million lower than initially agreed (though this decrease was offset by a more favorable currency exchange rate). With the closing of the Bombardier Transportation sale expected on Jan. 29, it appears that the twists and turns of this transaction are finally coming to an end.
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