DBRS Confirms Groupe Aeroplan Inc. at BBB, Pfd-3, Stable Trend

DBRS has today confirmed Groupe Aeroplan Inc.’s (Aeroplan or the Company) Issuer Rating and Senior Secured Debt rating at BBB, and its Preferred Shares rating at Pfd-3, all with Stable trends. Aeroplan continues to benefit from its strong positions in the Canadian and U.K. loyalty markets. In 2010, gross billings amounted to $2,188 million (vs. $1,447 million in 2009). The majority of the increase over the prior year was attributable to the inclusion of Carlson Marketing ($635 million), which Aeroplan acquired late in 2009. Cost of rewards, direct costs and SG&A* increased accordingly. As such, adjusted EBITDA increased to $312 million* in 2010 from $282 million in the prior year. For the first half of 2011, modest growth in gross billings thanks to higher airline, travel and financial partner activity in Canada, as well as steady margins, led to adjusted EBITDA* of $161 million (vs. $151 million in the same period last year).

In terms of Aeroplan’s financial profile, the Company continues to benefit from strong and stable free cash generating capacity that has historically been coupled with relatively low levels of debt. Cash flow from operations was approximately $324 million* in 2010 compared to $289 million in 2009. Significant financing activities in 2010 included a preferred share issuance of $172 million, the repurchase of common shares amounting to $142 million, and debt reduction of $140 million. The decrease in balance sheet debt to $644 million resulted in an improved debt-to-adjusted EBITDA* of 2.06x for 2010 from approximately 2.77x in 2009. During the first half of 2011, Aeroplan’s cash flow from operations and capex was in line with expectations. Free cash flow and cash on hand was used to repurchase $100 million of common shares, and reduced debt by $100 million. This resulted in a total debt balance of $546 million and debt-to-adjusted LTM EBITDA* of 1.70x.

Going forward, DBRS expects Aeroplan’s earnings profile to remain stable and consistent with the current rating profile, based on its strong market position in both Canada and the United Kingdom and the added benefit of steadily improving diversification. We expect the uncertain economic environment will lead to more modest growth in the near term, and forecast adjusted EBITDA to be approximately $325 million in 2011, and in the range of $350 million to $375 million in 2012. In terms of financial profile, operating cash flow should continue to track adjusted EBITDA, capex should remain modest (approximately $50 million per year), and dividends should grow steadily from the current $110 million per year level. As such, DBRS still expects Aeroplan to generate free cash flow after dividends of $175 million to $200 million per year over the next couple of years.

Although Aeroplan would have the capacity to reduce debt substantially and improve its financial profile even further with its free cash flow, DBRS expects the Company will use free cash flow primarily to fund its growth ambitions and/or increase returns to shareholders while maintaining debt-to-adjusted EBITDA in the range of 2.0x and 2.5x. Although the current earnings profile is still relatively concentrated, DBRS expects Aeroplan’s growth strategy, particularly in new markets, to continue to benefit from geographic diversification over the longer term.

• Denotes the exclusion of the impact of ECJ VAT Judgment ($62.1 million) on the Nectar Program, and/or other non-recurring items.

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

The applicable methodologies are Consumer Products and DBRS Preferred Share and Hybrid Criteria for Corporate Issuers, which can be found on our website under Methodologies.