DBRS Confirms Canadian Tire Corporation, Limited at A (low), R-1 (low)

DBRS has today confirmed the Debentures and Commercial Paper ratings of Canadian Tire (CTC or the Company) at A (low) and R-1 (low), respectively – both with Stable trends. The action is based on DBRS’s view that management of CTC will take appropriate measures to protect the credit risk profile of the Company within the context of a difficult operating environment.

CTC has continued to perform relatively well during a deteriorating economic environment in 2008. The Company delivered close to flat same-store sales growth for the first nine-months of the year. DBRS expects the Company will deliver overall top-line growth of approximately 4% for the full year 2008, however, tighter margins and lower earnings in the financial services segment should result in roughly flat consolidated EBITDA (2007 EBTIDA: $905 million). In terms of financial profile, balance sheet debt remains at fairly high levels (approximately $1,750 million at September 28, 2008) as CTC continues to carry a historically high level of credit card receivables on its balance sheet. That said, key credit metrics adjusted for debt deemed to be associated with finance receivables remain steady and fair for the current rating category.

DBRS believes the economic environment in Canada will continue to deteriorate and remain difficult for most of 2009. Although CTC possesses many strengths and has performed relatively well to date, DBRS does not believe it is immune to the effects of the economic cycle. Weakness in consumer spending should pressure the Company’s same-store sales and operating income, despite its diversified product mix and defensive nature. In addition, lower growth rate, higher charge-offs and higher cost of funding will have a negative impact on CTC’s Financial Services segment (which represents approximately 30% of consolidated operating income) in 2009. DBRS forecasts that CTC’s EBITDA will remain flat at best in 2009 (i.e., approximately $900 million) based on our estimate for negative same-store sales in the low single-digit range.

That said, DBRS believes CTC will be able to protect its credit risk profile based on its intention to increase free cash flow generation and reduce debt. DBRS estimates that EBITDA of $900 million in 2009 would likely convert to cash flow from operations before changes in working capital of approximately $625 million. More importantly, DBRS expects CTC to reduce capital expenditures to less than $400 million in 2009 (versus $588 million in 2007 and approximately $533 million estimated for 2008). These factors, combined with our expectation that the Company will refrain from dividend increases, share repurchases and acquisitions (of meaningful size) should enable the Company to generate free cash flow before any benefit from changes in working capital of almost $200 million. This should enable CTC to maintain key credit metrics in a difficult 2009 if free cash flow is used for debt reduction.

In terms of liquidity, CTC benefits from its positive free cash flow position going forward, committed bank lines totaling approximately $1.22 billion until close to the end of 2009, CP program of $800 million ($367 million outstanding at the end of Q3 2008) and its manageable corporate debt maturity schedule. DBRS will continue to carefully monitor how CTC funds its operations (the Financial Services segment in particular) going forward as we remain cautious with regards to the state of the securitization market. Difficult market conditions that lead to further balance sheet funding for financial services assets and reduce overall financial flexibility could result in pressure on the Company’s liquidity profile (i.e., the short-term rating and trend).

DBRS believes 2009 should represent the bottom of the cycle – as we expect the economy will begin to show signs of recovery toward the end of the year – and CTC’s good brand name and market position should keep the Company well positioned to grow earnings as the economic climate improves. If the Company performs as we expect and follows through with debt reduction, the trend should remain Stable. Should credit metrics deteriorate any further based on weaker than expected operating performance, inadequate debt reduction and/or a deeper/longer than expected economic downturn (that erodes the Company’s capacity to manage its credit metrics), the ratings and/or trends would be pressured.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Merchandisers, which can be found on the DBRS website under Methodologies.

This is a Corporate Rating.