The Deal That Didn't Die

| About: Bombardier Inc.B (BDRBF)

Summary

Ilyushin Finance Changed its Deal.

Market circumstances are radically changed.

Bombardier saved the deal.

Reading the analysis of the news about Ilyushin Finance (IFC) and Bombardier (OTCQX:BDRBF) you might feel that things are really bad. You might be wrong.

IFC is based in Moscow. This means the company has seen its business environment undergo radical exogenous impacts. The Russian currency has seen an awful relative loss of buying power. Then, on top of this, the Russian invasion and annexation of Crimea has led to western sanctions. This of course helped drive the ruble lower. But it also means that Russian firms cannot get the access to western finance as they used to.

As is noted in this Russian news source, the combination of factors has been watched closely by anyone concerned with Bombardier and IFC's deal. With a Canadian dollar exposure to fund and a Russian ruble income stream, IFC is in a very tough spot.

When one considers the immense hurdles IFC has to overcome now with respect to the deal, how come the deal didn't simply collapse?

The answer has to be that IFC made deposits on the deal which it cannot get back. Moreover, as an early CSeries customer, IFC got preferential pricing. IFC will not get that pricing gain. Especially since Air Canada ("TSE:AC"), Korean Air (KRX: 003490), Swiss (a division of Lufthansa ETR:LHA) and Delta (NYSE: DAL) all are Bombardier CSeries customers. For IFC, the capital loss would be too painful and the opportunity to deploy an asset that could be leased to western customers and deliver US $ revenues is a risk worth taking.

Rather than see an early customer struggle with circumstances not of its making, Bombardier clearly came through. They reworked the deal to lower exposure for IFC. IFC stays on as a customer, even without Canadian export credits. IFC does not lose its delivery slots. IFC does not lose its deposits. IFC is in a position to be able to offer CSeries and Q400s to customers.

Bombardier does not lose a customer - even if they were going to keep the deposit anyway. While a customer loss would have been understood given the Russian factor, Bombardier used this opportunity to send the airlines and lessors a very important signal. We can and will stand by our customers.

Bombardier is sending this signal to say it has the financial wherewithal to help customers. It is a message that will resonate in the right places. It is the kind of signal (and deal) that one expects from Airbus (OTCPK:EADSF) and Boeing (NYSE: BA). It was not expected from Bombardier. Which makes it all the more important. Bombardier shareholders are seeing the depth of industry knowledge the new commercial aerospace management team has.

The news wasn't as bad as one might have thought at first. Indeed, the IFC situation allows Bombardier to show it has depth in finance and customer support.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Industrial Equipment & Components, Canada, Expert Insight
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