DBRS Confirms RONA at BBB, Trend Stable

DBRS has today confirmed the Senior Unsecured Debt rating of RONA inc. (RONA or the Company) at BBB with a Stable trend. This reflects DBRS’s view that RONA’s management took appropriate measures to protect the Company’s credit profile during the recent economic downturn. As a result, earnings in F2009 were in line with expectations, considering that this period appeared to be the bottom of the recession. During the year, RONA’s management maintained conservative operating objectives that helped to maintain liquidity and a solid balance sheet. This was supported by a reduction in capex and a $172.5 million equity issue. While revenue and profits were down in 2009, the Company managed to: (i) keep EBITDA above $325 million, (ii) hold the EBITDA margin above 7%, (iii) keep debt-to-EBITDAR below 2.65 times (x), and (iv) improve liquidity with positive free cash flow, more cash on hand ($240 million) and unused bank lines ($650 million).

DBRS expects that RONA’s performance in 2010 will improve slowly, based on a gradual economic recovery and a number of strategic initiatives. During this year, the Company expects that its credit metrics could improve slightly based on better profitability and cash flow, due to: (i) higher same-store sales with increased product offerings, including private-label products, (ii) greater market share, with new stores and a larger affiliate network, and (iii) success with its ongoing cost-control programs. The rating also takes into account RONA’s plans to continue to make tactical acquisitions, as long as they are not too large. RONA’s growing brand recognition is helping these efforts and attracting independent dealers to join the RONA system. This is aided by a multi-banner strategy and a flexible store ownership structure that includes corporate stores, franchise stores and affiliates. The Company expects that the expansion program will increase market share from 17.5% to 20%. This growing scale helps to support its well-developed logistics/distribution operation, which is managed as a profit center.

If there were another economic downturn, or a significant increase in competition, DBRS believes that RONA would show a continued commitment to minimizing the impact on its credit metrics. Even so, if the Company were to experience a decline in operating performance, elevated capex, or make large acquisitions or debt-financed share buybacks resulting in a serious deterioration in cash flow or liquidity that pushed the debt-to-EBITDAR ratio well above 2.65x, the rating or trend could come under pressure.

Notes:
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.