DBRS Downgrades Ratings of Aimia Inc. to BBB (low), Pfd-3 (low)

DBRS Limited (DBRS) has today downgraded Aimia Inc.’s (Aimia or the Company) Issuer Rating and Senior Secured Debt rating to BBB (low) and its Preferred Shares rating to Pfd-3 (low). The trends are all Stable. The rating action reflects a deterioration in Aimia’s earnings profile, caused by a number of developments which DBRS believes will lead to a decline in operating income over the near to medium term.

In its press release on September 2, 2014, DBRS stated that it believed adjusted EBITDA (excluding non-recurring items and distributions from Premier Loyalty & Marketing’s Club Premier loyalty program) would decrease to approximately $300 million in 2014 because of 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). Going forward, DBRS expected that operating performance would benefit from increased customer engagement resulting from the enhancements to the Aeroplan program as well as higher pricing from more favourable contract terms.

While DBRS recognizes elements of progress made to date following the program transformation, a number of factors have caused management’s guidance for adjusted EBITDA to fall to approximately $235 million in 2015. These factors include margin pressure in the Aeroplan business (as a result of lower yield, reduced card spending and increased costs of rewards), the non-renewal of Groupe Auchan at Nectar Italia (its largest partner in Italy), the loss of a major client in its proprietary loyalty services business in Canada and the yet-to-be-determined impact, if any, from credit card interchange fee reform.

As such, DBRS forecasts that credit metrics will weaken to a level that is no longer appropriate for the previous rating category (i.e., gross debt-to-adjusted EBITDA before distributions of approximately 1.75 times (x) to 2.25x and adjusted EBITDA interest coverage of around 7.0x). DBRS now expects gross debt-to-EBITDA to increase to approximately 2.8x at the end of 2015 and adjusted EBITDA interest coverage to decrease to 6.2x, levels more appropriate with the BBB (low) and Pfd-3 (low) rating categories.

The Stable trends reflect DBRS’s view that Aimia will begin to grow its earnings off the new baseline based on the strength of its brands and relationships with key commercial partners. Gross billings should benefit from its strong market positions in Canada and the United Kingdom and its steadily improving geographic and sponsor/partner diversification, as the Company continues to grow its data analytics business and expand globally. The trends also acknowledge Aimia’s exposure to consumer spending and redemption patterns, the significant but moderating degree of revenue concentration and increasing loyalty program offerings from competitors.

In terms of financial profile, DBRS believes Aimia will continue to be a substantial free cash flow generating company. DBRS expects that in 2015, free cash flow after dividends will be approximately $80 million. Free cash flow along with cash on hand is expected to be applied toward share repurchases and small tuck-in acquisitions rather than to repay debt. DBRS believes that Aimia has adequate capacity in the new rating category to execute its business strategy and capital allocation plans over the near to medium term. DBRS forecasts that key credit metrics should remain appropriate for the new rating category (i.e., gross debt-to-adjusted EBITDA before distributions of approximately 2.25x to 3.0x and adjusted EBITDA coverage near 6.0x).

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.

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

The applicable methodologies are Rating Companies in the Consumer Products Industry (October 2014) and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), which can be found on our website under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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