DBRS Rates Groupe Aeroplan Inc.’s Secured Debt Issue at BBB with a Stable Trend

DBRS has today assigned a rating of BBB with a Stable trend to Groupe Aeroplan Inc.’s (Aeroplan, the Company, or the Issuer) minimum of $150 million Senior Secured Debt issue. The Notes will be direct secured obligations of the Issuer and will rank pari passu with all other secured and unsubordinated indebtedness of the Issuer. In the event that the pari passu ranking secured and unsubordinated indebtedness becomes unsecured, the Notes will become direct unsecured obligations and will rank pari passu with all other unsecured and unsubordinated indebtedness of the Issuer. Proceeds will be used to repay existing bank debt (i.e., bridge facility) and for general corporate purposes.

The rating continues to reflect Aeroplan’s leading market position in the Canadian loyalty marketing industry and its strong relationships with key commercial partners, which have contributed to healthy margins and stable profitability. Aeroplan’s financial profile continues to benefit from its strong free cash flow generating capacity, and relatively low level of debt.

DBRS initiated coverage of Aeroplan on October 16, 2008. At that time, DBRS expected that Aeroplan’s earnings profile would remain stable and consistent with the current rating category, based on its strong market position in Canada and the benefit of improved diversification resulting from the LMG acquisition. DBRS also expected that growth in operating income (i.e., adjusted EBITDA) would slow in the near term as a weaker economy affected consumer spending, including travel consumption. DBRS forecast that adjusted EBITDA in Canada would grow modestly in 2008 and 2009 and may only reach the $300 million level by 2010 (from $252 million in 2007).

In terms of financial profile, DBRS forecast that Aeroplan would generate free cash flow after dividends of approximately $200 million for each of 2008 and 2009, and use it primarily to fund growth (acquisitions of existing loyalty programs and/or investments to develop new ones), while maintaining a gross debt-to-adjusted EBITDA in the 2.5 times (x) to 3.0x range. DBRS stated that if Aeroplan was challenged to maintain its financial profile in this range due to weaker-than-expected operating performance or more-aggressive-than-expected financial management, the Company’s current rating would likely come under pressure. On the other hand, Aeroplan’s rating could benefit from enhanced profitability and diversification achieved through growth that is financed within the Company’s stated guidelines.

On February 27, 2009, Aeroplan reported full-year 2008 results. Financial performance was solid, with adjusted EBITDA of $317 million for the year – roughly in line with our expectations of strong growth in Canadian gross billings offsetting some softness in Europe and the Middle East. That said, the Company recorded an impairment charge of $1,161 million (non-cash) on goodwill and other long-lived assets at the end of 2008. The impairment tests were triggered by the loss of market capitalization, which reflects the recent deterioration in global capital markets and the economic environment (which are generally expected to affect general consumer spending and travel).

In terms of financial profile, Aeroplan has continued to strengthen, with free cash flow generation of $177 million (vs. $119 million in 2007), which reduced the Company’s net debt position by approximately $125 million (after accounting for approximately $40 million used for acquisitions in the year). Aeroplan ended 2008 with gross debt of $697 million and gross debt-to-adjusted EBITDA of 2.2x (vs. gross debt-to-pro forma adjusted EBITDA of approximately 2.5x at the end of 2007).

Going forward, DBRS expects that the difficult economic environment will lead to a decline in adjusted EBITDA over the near term, and is now forecasting approximately $290 million in 2009. As such, DBRS’s previous view that Aeroplan would reach adjusted EBITDA of approximately $350 million by 2010 has been revised and extended out to approximately 2012. Since operating cash flow should continue to track adjusted EBITDA, and capex and dividends should remain steady, we still expect Aeroplan to generate free cash flow after dividends of $175 million to $200 million per year over the next couple of years.

DBRS also still expects the Company to use cash and free cash flow primarily to fund its growth ambitions (acquisitions of existing loyalty programs and/or investments to develop new ones), while maintaining gross debt-to-adjusted EBITDA in the 2.5x to 3.0x range over the long term. For the time being, gross billings remain concentrated: in Canada, approximately 50% comes from the Canadian Imperial Bank of Commerce Visa program and almost 26% comes from Air Canada; in the United Kingdom, Sainsbury’s is responsible for approximately 60% of gross billings.

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

The applicable methodologies are Rating Consumer Products and Rating Merchandisers, which can be found on our website under Methodologies.

This is a Corporate rating.