DBRS Confirms Aimia’s Ratings Following Announcement of New Agreement with TD and Changes to the Aeroplan Program

DBRS has today confirmed Aimia Inc.’s (Aimia or the Company) Issuer Rating and Senior Secured Debt rating at BBB and its Preferred Shares rating at Pfd-3, all with Stable trends, following the announcement that the Company has entered into a new ten-year financial credit card agreement with TD Bank Group (TD), effective from January 1, 2014. The Company also announced material changes to its Aeroplan program.

DBRS’s confirmation is based on the certainty provided from the new agreement with TD, which replaces its existing contract with CIBC that was set to expire on December 31, 2013. CIBC does, however, retain a contractual right to match the terms of the Agreement on or before August 9, 2013. The confirmation reflects DBRS’s view that the terms of the new agreement are more attractive for Aimia regardless of whether CIBC were to match the offer. The rating action also acknowledges that an agreement with TD would be subject to significant migration risks, which could negatively affect gross billings.

Aimia’s ratings have consistently reflected DBRS’s view that the Company would either renew its contract with CIBC or complete a new financial credit card agreement with a third party that would not be on terms considered materially detrimental to the Company’s credit risk profile. Aimia’s ratings continue to be based on the strength of its brands and strong relationships with key commercial partners, as well as its strong free cash flow generating capacity and moderate financial leverage. The Company’s ratings also take into consideration the fact that Aimia’s profitability remains dependent on consumer spending and redemption patterns, and that a moderate degree of revenue concentration still exists.

Key terms of the new agreement include:
-- A more than 15% increase in price per mile paid to Aimia,
-- A commitment to minimum miles purchases for the first three years,
-- A joint marketing spend of approximately $140 million over four years to support new cards and new Aeroplan program features,
-- Use of Aeroplan bonus miles to drive future member acquisition and longer-term growth in gross billings,
-- More comprehensive collaboration around data and customer insight analytics,
-- A $100 million upfront contribution payable to Aimia in 2014 to help fund the new program’s enhancements and
-- An $80 million contractual break fee payable in 2013 by Aimia to TD in the event CIBC exercises its contractual right to match on or before August 9, 2013.

In conjunction with the Agreement, Aimia also announced significant changes to the Aeroplan program in an effort to increase membership and customer engagement. The enhancements to the Aeroplan program include the launch of a new tiered recognition program (Distinction) that rewards top accumulating members with preferential mileage levels for redemption as well as, the replacement of Classic Plus Fight Rewards with new MarketFare Flight Rewards and the cancellation of the seven-year mileage redemption policy. As a result of the enhancements to the Aeroplan program, Aimia has changed its long-term breakage assumption to 11% from 18%. The change in breakage will result in a non-cash, after-tax adjustment to net earnings of approximately $520 million and negatively impact adjusted EBITDA by approximately $50 million in F2013.

Going forward, DBRS expects Aimia’s operating performance should benefit over the longer term from the growth that will come from increased customer engagement resulting from enhancements to the Aeroplan program as well as higher pricing from the Agreement. In the near term, operating performance could be negatively affected by a shift to TD and the corresponding rate of migration of members

Aimia’s free cash flow (after dividends) is expected to be negatively affected by a shift to TD (F2014) or the payment of a break-free to TD (F2013) but should remain positive through such time and begin returning toward the $200 million level by F2015. DBRS believes that Aimia will continue to use free cash flow to invest in growth initiatives, including acquisitions. The Company is expected to use cash on hand to repay approximately $150 million of debt maturing in 2014. As such, when combined with the expected decline in adjusted EBITDA, key credit metrics should remain within a range considered acceptable for the current rating category (i.e., gross debt-to-adjusted EBITDA before distributions of approximately 1.75x to 2.25x).

Should the migration rate from a potential switch to TD be weaker than expected and/or credit metrics deteriorate further to a level beyond that considered acceptable for the current rating category, a Negative rating action could result.

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.