DBRS Confirms Aimia Inc. at BBB and Pfd-3, Stable Trend

DBRS has today confirmed Aimia Inc.’s (Aimia or the Company) Issuer Rating at BBB and the ratings of its Senior Secured Debt and Preferred Shares at BBB and Pfd-3, respectively, all with Stable trends. The confirmation of the ratings is based on Aimia’s stable operating performance in its core markets, along with its improving diversification and stable free cash flow generation through F2012. The ratings continue to be supported by the strength of Aimia’s brands and its strong relationships with key commercial partners, as well as its stable free cash flow generating capacity and moderate financial leverage. The ratings also consider the fact that Aimia’s profitability remains dependent on consumer spending and redemption patterns, and that a moderate degree of revenue concentration still exists.

Aimia’s reported gross billings remained relatively flat at $2.24 billion in F2012, as stable performance in Canada and growth in the U.K. Nectar coalition program were largely offset by continued weakness in the United States and Asia-Pacific (U.S. & APAC) region. The decline was largely attributable to the Company’s restructuring efforts in its proprietary business segment in that region, as evidenced by the exit of the Qantas Airways (Qantas) business during Q1 F2012, as well as the continued phase-out of the Visa business. Adjusted EBITDA (excluding distribution from Premier Loyalty & Marketing, S.A.P.I. De C.V. (PLM)) increased to $387 million in F2012 from $342 million a year earlier, based largely on decreased fixed costs related to Qantas and lower redemption costs in Canada.

In terms of financial profile, Aimia continued to generate stable free cash flow of approximately $179 million, which, along with additional balance sheet debt, was used for investments (particularly an increase in stake in PLM) and small tuck-in acquisitions. The increase in balance sheet debt led to a deterioration in Aimia’s key credit metric (i.e., gross debt-to-adjusted EBITDA before distributions) to 2.05x in F2012 from 1.71x in F2011, a level that remains consistent with the current rating category.

Aimia is currently in negotiations for the renewal of its contract (currently set to expire on December 31, 2013) with Canadian Imperial Bank of Commerce (CIBC), one of its largest Accumulation Partners. Although DBRS expects a mutually beneficial agreement between the two parties to be likely, DBRS understands that Aimia may sign a new contract with another financial institution. DBRS will continue to monitor the negotiations and should any significant changes arise, DBRS will consider and assess the impact of such an event on Aimia’s credit profile at that time.

Notwithstanding the results of the negotiations, DBRS expects gross billings to increase in the low single-digit range toward the $2.3 billion mark by the end of F2013, driven largely by growth in the EMEA coalition business and stable performance in Canada. Revenue should increase in the mid-single-digit range, due to higher redemption activity in its Aeroplan program, as well as modest growth in the U.S. & APAC segment following the F2011 and F2012 restructuring activities. As such, adjusted EBITDA excluding distributions from PLM is expected to grow in line with gross billings, increasing toward $415 million at the end of F2013.

In terms of financial profile, DBRS expects Aimia’s cash flow from operations after changes in working capital and deferred revenue will continue to track adjusted EBITDA. Capex is expected to be slightly higher in F2013 due to further software developments and dividend growth is expected to remain modest. As such, DBRS expects Aimia will continue to generate positive free cash flow toward the $200 million mark in F2013. DBRS anticipates the majority of free cash flow to be utilized toward funding the Company’s growth ambitions in the form of further investments and/or tuck-in acquisitions. Debt levels should remain fairly stable in F2013 and into F2014. In the longer term, DBRS expects Aimia to maintain its leverage at an appropriate level for the current rating category and keep its gross debt-to-adjusted EBITDA (before distributions) within the 1.75x and 2.25x range.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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.