DBRS Confirms Ratings of Aimia Inc. at BBB with Stable Trends

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 the Company’s relatively stable operating performance and credit metrics through 2013 and progress made to date with the Aeroplan program transformation and financial cards agreement with TD Bank Group (TD; rated AA with a Stable trend by DBRS) and Canadian Imperial Bank of Commerce (CIBC; rated AA with a Stable trend by DBRS). The ratings continue to be based on the strength of Aimia’s brands and its strong relationship with key commercial partners. The ratings also reflect the Company’s high exposure to consumer spending and redemption patterns, as well as the significant but moderating degree of revenue concentration.

Reported gross billings increased by 5.5% to $2.4 billion in 2013 from 2012, driven primarily by strong growth in the Europe, Middle East and Africa loyalty coalition business and a full-year contribution of results from Excellence in Motion. Reported revenue decreased to $1.7 billion in 2013 from $2.2 billion in 2012 due to the unfavourable change in breakage estimates (~$664 million) that resulted from the transformation of the Aeroplan program in Q2 2013. Adjusting for this impact, Aimia’s revenue increased by 5.7% to $2.4 billion. Cost of rewards remained flat and selling, general and administrative costs increased related to higher marketing and promotional fees associated with the transformation of the Aeroplan program in Canada. As such, adjusted EBITDA (adjustment excludes Aimia’s payment to CIBC in relation to the sale of approximately half of the Aeroplan portfolio to TD, net migration provision and distribution from PLM Premier) remained relatively flat at $385 million in 2013 versus $387 million in 2012.

In terms of financial profile, Aimia’s free cash flow before changes in working capital increased to $197 million in 2013 from $136 million a year earlier, based mainly on lower income tax expenses, slightly lower capital expenditures (capex) and a modest increase in dividends. Free cash flow was largely used to fund the $150 million payment to CIBC in relation to the sale of approximately half of the Aeroplan card portfolio to TD and to finance small tuck-in acquisitions. Total balance sheet debt remained stable at $793 million, which, when combined with flat operating income, led to relatively steady credit metrics (i.e., debt-to-adjusted EBITDA of 2.07 times (x) in 2013 versus 2.05x in 2012 and adjusted EBITDA coverage of 7.17x in 2013 versus 7.62x in 2012).

Going forward, DBRS expects Aimia’s gross billings will increase in the high-single digits to more than $2.5 billion in 2014, driven by the $100 million upfront payment from TD, increased active co-branded credit cards following the TD agreement and continued strong growth in the Nectar program. Redemptions are expected to be significantly higher in 2014, resulting primarily from the introduction of the Distinction program in Canada, which offers enhanced travel reward options. As a result, DBRS expects adjusted EBITDA (excluding non-recurring items and distributions from PLM Club Premier) will decrease to approximately $300 million. Over the medium term, DBRS expects Aimia’s operating performance will benefit from the growth that will come from increased customer engagement resulting from the enhancements to the Aeroplan program, as well as higher pricing from more favourable contract terms.

DBRS expects Aimia’s financial profile to remain commensurate with the current rating category, based on strong and stable free cash flow-generating capacity and steady leverage. DBRS believes free cash flow will decline modestly due to slightly higher capex requirements and continued growth in the Company’s dividend payments. Free cash flow is expected to continue to be applied primarily toward small tuck-in acquisitions, most likely in the data analytics business. DBRS anticipates that Aimia will 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 appropriate for the current rating category (i.e., gross debt-to-adjusted EBITDA before distributions of approximately 1.75x to 2.25x and adjusted EBITDA coverage around 7.0x).

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 methodology is Rating Companies in the Consumer Products Industry, which can be found on our website under Methodologies.

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