DBRS Confirms RTL-Westcan Ratings, Changes Trend to Stable

DBRS has today confirmed the Issuer Rating of RTL-Westcan Limited Partnership (RTL-Westcan or the Partnership) at B (high) and has changed the trend to Stable from Negative. The trend change reflects a material improvement in operating performance in fiscal 2011 (year ending October 31) and, consequently, in financial ratios as the Partnership applied the increased free cash flow toward debt reduction. With RTL-Westcan’s financial ratios in line with our expectations for the rating and adequate liquidity, previous downward pressure on the rating is now alleviated. Pursuant to DBRS’s leveraged finance rating methodology, DBRS has also confirmed the recovery rating of RR3 and an associated BB (low) rating on the Partnership’s Senior Secured (Second Lien) Debt. The trend on the Senior Secured (Second Lien) Debt has also been changed to Stable from Negative.

Since its acquisition of ECL Transportation Ltd. (ECL) in April 2010, RTL-Westcan has been a market leader in the niche segment of providing hauling service for fuel, bulk products (including grain, fertilizer, anhydrous ammonia, sulphur, lime, salt and coal) and asphalt, with a focus on the western and northern Canadian markets. With one of the largest fleets in the region and good supporting facilities, the Partnership has a strong market position, ranking among the top three players and capturing at least 30% market share in each product segment. Although the trucking industry is fragmented, there is a material barrier of entry in RTL-Westcan’s specific niche segment, created by the need to invest in and efficiently manage a specialized fleet, as well as safety requirements for hauling hazardous or inflammable goods and capability required to handle transport in harsh weather conditions. This, in combination with the Partnership’s ownership of supporting facilities, should help make RTL-Westcan’s market position defendable and limit future competition. Hauling remains the core and dominant business segment, generating more than 80% of revenue and EBITDA, while the Construction and Aviation divisions operate mainly to support the needs of its customers, which require logistics support for the facilities they operate in remote areas.

DBRS considers the trucking industry highly cyclical and, as a relatively small niche player serving specific industry segments in a focused geographic region, RTL-Westcan is exposed to specific factors that could affect its revenue and earnings. Demand for its hauling services could be affected by demand and prices of fuel and other bulk commodities, as well as by weather conditions affecting agricultural and road construction activities, and demand for heating fuel and winter road transports. In addition, while industry competition keeps pricing competitive, hauling operators have limited control over a number of cost items such as fuel and labour. This was evidenced in fiscal 2009 and 2010 when a combination of factors (weak economic conditions, unfavourable weather patterns, driver shortages and increased maintenance costs) resulted in EBITDA that was 25% to 30% lower than the level seen in fiscal 2008.

We understand that RTL-Westcan has taken measures to reduce revenue and earnings volatility by (1) supplementing its year-round baseload fuel hauling business with other products that have different seasonal peaks, (2) replacing part of its fleet acquired from ECL with newer and more fuel-efficient vehicles and (3) focusing on hiring and training new drivers to alleviate driver shortages. We believe that these efforts would only partly reduce the magnitude of the impact on earnings if conditions in fiscal 2010 were to repeat themselves, and would not entirely mitigate the inherent volatility of the industry.

Despite the industry risks mentioned above, RTL-Westcan has a proven track record of performance and safety, which allows it to maintain long-established business relationships with mining and oil and gas operators in the region and enter into medium-term contracts (typically with three to five years of duration) with these clients. More than three-quarters of RTL-Westcan’s revenue is generated by these contracts. These relationships provide a degree of earnings and cash flow stability and the Partnership has been able to generate about $10 million to $15 million in free cash flow annually under normal business conditions. Hence, with the return to normal business conditions in fiscal 2011, RTL-Westcan was able to use the free cash flow to reduce debt to a more sustainable level and improve its financial ratios to levels more consistent with its rating.

DBRS expects the Partnership’s debt coverage metrics to remain relatively stable in fiscal 2012, as much of the projected operating cash flow would be used to finance a higher projected level of capital expenditure, mainly related to additional tractors and trailers to expand its fleet and to replace some older vehicles. Therefore, further debt reduction and improvement in financial ratios during the year would likely be modest. While RTL-Westcan’s cash flow coverage metrics are now consistent with the current ratings, DBRS believes that it is necessary for the Partnership to sustain these metrics for the next one to two years to maintain the rating. Therefore, rating upside during this time frame is rather limited. Conversely, RTL-Westcan’s rating could come under pressure again if a congruence of unfavourable conditions were to reappear (as in fiscal 2010) or if the Partnership decides to adopt a more aggressive growth strategy that materially increases its debt level or leads it to enter businesses with materially higher business risks.

Notes:
The applicable methodologies are Rating Companies in the North American Trucking Industry and DBRS Criteria: Rating Leveraged Finance, which can be found on our website under Methodologies.