DBRS Confirms Wajax Corporation Issuer Rating at BB (high); Senior Unsecured Notes Rating at BB (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Wajax Corporation (Wajax or the Company) at BB (high) and the Company’s Senior Unsecured Notes rating at BB (low), based on a Recovery Rating of RR6. The trends remain Stable. The confirmation reflects the Company’s demonstrated commitment to maintaining a strong financial profile during a period of challenging market conditions. In particular, the decision to issue equity to reduce debt led to a stronger set of debt metrics despite continued weakness in operating earnings and cash flows. During the 12-month period (LTM) to June 2015, the Company also reduced its dividend payout policy and undertook restructuring actions at both its Power Systems and Industrial Components divisions to reduce costs and improve efficiency, including workforce reductions. All of Wajax’s key coverage metrics are well above the current rating category ranges, and the financial profile improved over the 12 months to June 2015.

During that period, market conditions, especially in Wajax’s key Western Canadian sectors (mining, oil and gas, oil sands) deteriorated further, as reflected in the continued declines in commodity prices. This led to decreased equipment sales volumes and deferrals of maintenance and repair work, as Wajax customers focused on reducing expenditures. While some growth was achieved in other sectors, for example forestry equipment sales rose across Canada in H1 2015, the impact of the economic slowdown on Wajax’s Western Canadian customers caused a drop in overall earnings and operating cash flows.

The outlook for Wajax is for a continued challenging market environment, especially in Western Canada. However, as a result of the recent debt reduction, the Company has some cushion in its financial profile to weather the continued weakening of earnings and operating cash flows expected going forward through the end of 2015 and into 2016. DBRS expects Wajax to make progress toward the achievement of its longer-term strategy: focusing on improving customer relationships, growing core businesses organically, making modest acquisitions to bolster repair and maintenance capacity, and improving internal systems. Should markets continue to deteriorate, or remain at their depressed level for an extended period of time, certain of Wajax’s customers who are currently operating at a loss may need to cease operations. If this were to lead to a material reduction in operating performance and/or if debt-financed acquisitions were to be greater than expected, resulting in adjusted debt-to-EBITDA rising above 3.5 times on an LTM basis, a negative rating action may be required.

Notes:
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 Companies in the Capital Goods Dealership Industry (June 2015) and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.

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