DBRS Confirms Finning International at A (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Debentures and Medium-Term Notes rating of Finning International Inc. (Finning or the Company) at A (low) and the Company’s Commercial Paper (CP) rating at R-1 (low). The trends are Stable. The confirmations reflects the Company’s solid business profile and some improvement in key credit metrics in 2014. DBRS notes that key credit metrics remain at the low end of the current rating range and do not have any cushion to absorb any meaningful decline in operating performance. DBRS could take negative rating action if EBITDA performance (on a last 12 months (LTM) basis) declines by more than 5% from 2014 levels.

Finning achieved mixed results relative to initial expectations in 2014. Sales were buoyant in the United Kingdom and Canada but declined in South America. EBITDA, on the other hand, was below Company-forecasted levels due to pricing pressure and lower earnings margins at the U.K. and South American operations. The Company had solid cash flow generation and paid down approximately $85 million of debt, allowing for modest improvement in credit metrics relative to 2013 levels. Cash on hand increased to $450 million as other debt reduction opportunities were limited, with capital structure fully consisting of long-dated debt.

The Company is expected to encounter some headwinds going forward. The visibility for previously-forecasted earnings-driven improvement beyond 2014 has deteriorated because of challenging conditions in the resource industries. Mining and oil and gas segments continue to see project cancellations or deferrals because of lower commodity prices. Although the environment for product support remains relatively stable, new equipment sales are subject to decline in 2015 due to a deteriorating outlook. Overall revenues are expected to decline by low- to mid-single digits, with product support providing some offsetting momentum as a result of its more stable nature.

Credit metrics will remain constrained by the challenging market outlook and the lack of debt repayment available to the Company. As such, DBRS expects Finning to maintain a level of cash on hand to offset the impact of a mismatched capital structure. With lower anticipated earnings as a result of challenging conditions and flat gross debt levels, DBRS forecasts that all credit metrics will deteriorate slightly. Nevertheless, DBRS could take negative rating action if EBITDA performance on an LTM basis declines by more than 5% from 2014 levels.

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 methodologies are Rating Companies in the Capital Goods Dealership Industry (July 2014) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2015), which can be found on our website under Methodologies.