DBRS Confirms Canadian Tire at BBB (high), R-2 (high), Stable Trends, Following Sale of 20% of Its Financial Services Business to Scotiabank

DBRS has today confirmed the Issuer Rating, Medium-Term Notes and Debentures ratings of Canadian Tire Corporation, Limited (CTC or the Company) at BBB (high), and its Commercial Paper rating at R-2 (high), all with Stable trends. This rating action follows CTC’s announcement earlier today of a far-reaching strategic partnership with Scotiabank, under which Scotiabank will acquire 20% of the equity interest in Canadian Tire’s financial services business for $500 million in cash (the Transaction).

On August 9, 2013, DBRS commented that should CTC undertake a partnership with respect to its financial services business in a form that allows the Company to retain a reduced income stream and the strategic benefits of its credit card portfolio, the impact on the rating would likely be neutral (see separate press release).

As part of the Transaction, Scotiabank will also provide a funding commitment to Canadian Tire’s financial services business with credit card receivable financing of up to $2.25 billion. In addition, the Transaction provides an option for CTC to sell up to an additional 29% of its financial services business to Scotiabank within the next ten years at fair market value. Finally, the joint marketing arrangement agreed to as part of the Transaction ensures that Scotiabank will become the exclusive partner for new financial products offered to the Canadian Tire portfolio of customers and allows for joint efforts to introduce respective customers to each other’s brands with exclusive offers. The Transaction is expected to close by September 30, 2014.

DBRS believes that the Transaction will allow CTC to realize value and cash proceeds based on a solid valuation of its financial services business while retaining the strategic benefits of its credit portfolio, in support of its core retail operations. The Transaction also offers Canadian Tire enhanced financial flexibility (based on its put option for up to an additional 29%) and reduced funding risk associated with the financial services business (based on Scotiabank’s funding commitment).

DBRS expects that CTC will use at least a portion of the proceeds from the Transaction to complete incremental share repurchases and repay debt. The repayment of debt is not, however, a material consideration in the confirmation of CTC’s ratings. Going forward, should CTC exercise its option to sell an additional 29% of the equity in its financial services business, the use of proceeds would become a more important factor in determining the appropriate rating action at that time.

CTC’s ratings continue to be based on its strong brands, national geographic and format diversification, as well as its ownership of real estate through CT REIT. The ratings also reflect intense competition in Canadian retail, risks associated with growth and demands for increasing shareholder returns. DBRS believes that, subsequent to the Transaction, CTC remains well-placed in the BBB (high) rating category.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Merchandising Industry (October 2013), which can be found on our website under Methodologies.