DBRS Changes Trend on Wajax Corporation to Negative from Stable, Confirms Issuer Rating at BB (high) and Senior Unsecured Notes at BB (low)

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Wajax Corporation (Wajax or the Company) at BB (high) and changed the trend to Negative from Stable. The confirmation is supported by Wajax’s stable business risk profile. However, Wajax’s operating results have been in decline since 2014 and dipped even more sharply in the first half of 2016 primarily because of poor market conditions. The Negative trend thus reflects Wajax’s weakening financial profile. In particular, the adjusted debt-to-EBITDA ratio has risen to 3.6 times (x) for the last 12 months ended June 30, 2016 (about 4.3x on an annualized basis), which exceeded the 3.5x trigger for a Negative rating action, as stated in DBRS’s press release dated October 8, 2015. Unless the operating results and key credit metrics turn around in the second half of 2016, Wajax’s financial profile will not be compatible with the current ratings, and the Issuer Rating will likely be downgraded by one notch. Conversely, a sustained recovery in earnings, with all key credit metrics stabilized near 2015 levels, could lead to a trend change back to Stable. In addition, DBRS has confirmed the Company’s Recovery Rating at RR6 and, consequently, has confirmed the Company’s Senior Unsecured Notes rating at BB (low), for which the trend was also changed to Negative from Stable.

In 2015, Wajax’s operating results suffered a notable decline primarily because of weak markets in Western Canada as a result of the downturn in the mining and oil and gas industries. Nevertheless, Wajax’s financial profile remained within the current rating range partly because of the debt reduction from cash raised in an equity issue. The weak market environment in Western Canada continued through to 2016. A month-long wildfire near Fort McMurray, Alberta, had stopped/interrupted nearby oil sands operations, and the resultant reduced activities further depressed performance. In the first half of 2016, Wajax’s earnings and associated cash flow dropped precipitously — well below expectations. Wajax’s financial profile will not be compatible with the current rating if the weak operating performance persists in the second half of 2016. Current market conditions in Western Canada appear to have stabilized, an encouraging development. In addition, in March 2016, Wajax reorganized its three main businesses to improve operating efficiency and implemented cost-reduction actions. Wajax expects to realize savings between $6 million and $7 million in 2016 and $15 million in 2017 from these programs. Hence operating results in the second half of 2016 are expected to improve, supported by a modest increase in revenue (because of no wildfire disruption) and benefits from restructuring actions. However, Wajax’s ratings are at risk of a downgrade unless it can demonstrate a sustainable turnaround of its operating results.

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 methodology is Rating Companies in the Capital Goods Dealership Industry (June 2016), 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.