DBRS Confirms Groupe Aeroplan Inc. at BBB and 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. The ratings continue to benefit from the Company’s (1) brand strength in its core markets, (2) strong relationships with key Accumulation Partners and (3) stable free cash generating capacity. The ratings also reflect the fact that the Company’s overall performance depends heavily on consumer spending patterns and general economic conditions, and some degree of revenue concentration still exists.

In F2011, gross billings increased by 2% to $2,233 million from $2,188 million a year earlier, which was largely supported by strong performance in Aeroplan’s Canadian and EMEA operations since the U.S. segment continues to be negatively affected by a generally weak economic environment. Despite increases in the cost of rewards and operating expenses, reported adjusted EBITDA (excluding a goodwill impairment charge of $54 million related to the U.S. Proprietary Loyalty business) increased to $342 million (or $363 million excluding the impact of reorganization costs, which DBRS considers nonrecurring) in F2011 from $285.5 million a year earlier, largely thanks to lower future redemption costs.

In terms of Aeroplan’s financial profile, the Company continues to benefit from strong and stable free cash generating capacity and relatively low leverage. With slightly lower cash flow from operations, a steady capex level and a moderate increase in dividends, free cash flow in F2011 decreased modestly to $84 million from $114 million a year earlier. Free cash flow, along with a significant portion of cash on hand, was used toward share repurchases, short and long-term investments and moderate debt reduction, which resulted in the improvement of the Company’s key credit metric of gross debt-to-adjusted EBITDA (before non-recurring items) to 1.62 times (x) for F2011 from approximately 1.88x in F2010.

Going forward, DBRS expects that Aeroplan’s strong market positions in its core markets and its steadily improving geographic and product diversification should help maintain a stable earnings profile. DBRS forecasts gross billings to grow by 3% to 5% on the back of overall improvement in the economic environment in the Company’s key markets. As such, adjusted EBITDA is expected to be in range of approximately $365 million to $380 million in F2012. DBRS expects Aeroplan will continue to pursue growth that could include more acquisitions of existing loyalty programs and/or investment to develop new ones.

In terms of financial profile, operating cash flow in F2012 is expected to be somewhat negatively affected by the European Court of Justice (ECJ) value-added tax (VAT) judgment (slated to be completed toward the end of F2012). That said, DBRS still anticipates cash flow from operations (after changes in working capital and deferred revenue) to increase to the range of $290 million to $310 million. Dividends are expected to increase modestly and capital expenditures are expected to be slightly higher at approximately $55 million in F2012 to fund software development initiatives that were set toward the end of F2011. As such, DBRS expects Aeroplan to generate healthy free cash flow levels of $115 million to $135 million in F2012.

Although Aeroplan would have the capacity to further reduce debt and improve its financial profile, DBRS expects the Company will use its free cash flow primarily to fund its growth ambitions and increased returns to shareholders. As such, DBRS expects Aeroplan’s debt-to-adjusted EBITDA to operate within the range of 2.0x to 2.5x in the near to medium term.

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

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