DBRS Confirms and Changes Trend on Finning International Inc. to Negative from Stable

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) as well as the Company’s Commercial Paper rating at R-1 (low); however, the trends on all ratings are changed to Negative from Stable to reflect the Company’s weaker financial profile. Earnings and cash flows have declined because of the very difficult operating environment that has resulted from cyclical downturns in Finning’s key operating sectors. Despite its weaker financial profile, Finning’s business profile remains largely unchanged. The Company’s strong Caterpillar distribution franchise, its geographic and product diversification as well as its superior proportion of earnings from parts and service businesses continue to support the current rating while its exposure to cyclical end markets and weaker financial profile (for the current rating) are significant factors driving the trend change.

Finning’s recent operating performance results have been well below DBRS’s expectations. The downturn in key sectors such as mining and energy continue to negatively affect earnings and cash flows, and the financial profile has continued to deteriorate through 2015. DBRS has stated that Finning had no further cushion to accommodate further weakening of its credit metrics (please see February 27, 2015, press release). At that time, DBRS noted that revenues were expected to decline by low- to mid-single digits in 2015 and that a negative rating action could occur if EBITDA performance on a rolling 12-month basis declined by more than 5% from 2014 levels. For the last 12 months (LTM) through Q3 2015, revenues are down 6% compared with F2014 (despite the contribution of the new Saskatchewan business starting in Q3 2015) and adjusted EBITDA is off 9% for the same comparison period. Even considering the estimated annualized earnings impact of the Saskatchewan business (based on Q3 and estimated Q4 2015 contributions), adjusted EBITDA for F2015 would still be expected to fall by more than 5% compared with 2014.

Finning’s business risk profile is expected to improve modestly going forward as the Saskatchewan operations add another earnings/cash flow stream. The financial risk profile is expected to remain weak for the current rating until a cyclical recovery in the mining and energy sectors gains traction, although higher-margin maintenance work that can no longer be deferred by customers should play a modest mitigating role.

Although short-term debt fluctuates to accommodate working capital needs, the Company’s core debt consists entirely of long-term issuance, and repayments are not scheduled to begin until 2018. Given stiff redemption fees, debt repayment opportunities are limited despite Finning’s record of generating strong positive free cash flows. As a result, the strength of the financial profile will be driven by the Company’s operating performance going forward. If these results continue to fall and key metrics continue to weaken, DBRS may downgrade the Company’s ratings.

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 (June 2015) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.