DBRS Confirms Finning at A (low) upon Sale of Hewden

DBRS has today confirmed the rating of Finning International Inc. (Finning or the Company) at A (low) and R-1 (low), with a Stable trend, based on the Company’s announcement that it has sold Hewden Stuart Plc (Hewden), its U.K. equipment rental business, for gross proceeds of GBP 110.2 million, or $171 million, to an affiliate of Sun European Partners, LLP. DBRS views this sale as mildly positive, due to concerns about Hewden’s poor financial performance and the resulting negative impact on Finning’s overall financial profile. Hewden has been underperforming since it was acquired by Finning and divestiture of these rental operations will have a mildly positive impact on Finning’s overall operating performance. However, DBRS expects that the sale of Hewden will modestly reduce Finning’s free cash flow in 2010. The Company intends to use the proceeds from the transaction primarily to reduce debt. The sale of Hewden will also alleviate pressures on Finning management’s time, attention and resources from restructuring and streamlining activities that were required to improve Hewden’s operating performance and allow it to focus on Finning’s core operations.

The consideration comprises GBP 90.2 million in cash, an interest-bearing five-year loan note receivable of GBP 20 million, and a 5% equity warrant subject to certain performance conditions being met. The impact of the transaction will result in a second-quarter accounting loss of $247 million, which includes the realization of $101 million in foreign exchange losses relating to the investment in Hewden that was previously recorded in accumulated other comprehensive income, and a $68 million charge relating to the recognition of the unfunded pension liability (which has been assumed by the buyer). After taking these factors into account, a balance of $78 million is the loss on Finning’s net carrying value of Hewden, net of tax.

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

The applicable methodology is Rating the Industrial Products Industry, which can be found on our website under Methodologies.

This is a Corporate (Industrials) rating.