DBRS Confirms Aimia Inc. at BBB (low), Pfd-3 (low)

DBRS Limited (DBRS) has today confirmed Aimia Inc.’s (Aimia or the Company) Issuer Rating and Senior Secured Debt rating at BBB (low) and its Preferred Shares rating at Pfd-3 (low). The trends are all Stable. The confirmation reflects the expected decline of Aimia’s gross billings and earnings in 2015, that was discussed in DBRS’s report dated April 28, 2015. The ratings continue to be based on the strength of Aimia’s brands and its strong relationship with key commercial partners. The ratings also consider the Company’s exposure to consumer spending and redemption patterns and the significant degree of revenue concentration.

Not including the $100 million upfront payment from the Toronto Dominion Bank (TD) in 2014, gross billings decreased by 7.7% on a constant currency basis in 2015. This was primarily the result of the non-renewal of the Groupe Auchan contract at Nectar Italia, fewer promotional campaigns in the financial sector in the Aeroplan Program, and by lost contracts in the proprietary loyalty services business. Cost of rewards decreased by 3.3% on a constant currency basis as more expensive travel rewards were offset by lower redemption activity at Nectar and Nectar Italia. As such, adjusted EBITDA declined to $236 million in 2015. Aimia generated $7 million of free cash flow after dividends, and debt levels remained stable. As a result, credit metrics weakened to a level appropriate for the BBB (low) rating category. Debt-to-adjusted EBITDA and interest coverage moved to 2.74 times (x) and 5.69x, respectively, in 2015 versus 2.16x and 6.13x in 2014.

DBRS believes that Aimia will be challenged to grow its gross billings and operating income over the medium term, but this can be absorbed within the current rating category for the time being. Gross billings are expected to be relatively flat in 2016, as modest organic growth in the Aeroplan program is offset by a continued challenging environment at Nectar, client ramp down in Aimia’s proprietary loyalty services business and the potential further impact from credit card interchange fee reform. DBRS expects continued margin pressure mainly because of an increased cost of rewards and a strengthening U.S. dollar. As a result, DBRS believes adjusted EBITDA will decrease to approximately $225 million in 2016.

Despite the challenging conditions, DBRS expects that Aimia will generate approximately $20 million of free cash flow (after dividends and before changes in working capital) in 2016. This is based on stable operating cash flow, slightly reduced capex and unchanged dividends. DBRS expects that Aimia will continue to explore the sale of non-core assets and does not expect the Company to make any large acquisitions. Free cash flow along with cash on hand and any potential proceeds from non-core asset sales could be applied toward the $200 million of maturing debt in January 2017. This debt reduction would improve credit metrics within the range for the BBB (low) category. However, should EBITDA and/or key credit metrics deteriorate further in 2017, a negative rating could result (i.e., gross debt-to-adjusted EBITDA toward 3.0x and interest coverage below 5.0x).

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 methodologies are Rating Companies in the Consumer Products Industry and Preferred Share and Hybrid Criteria for Corporate Issuers, which can be found on our website under Methodologies.