DBRS Confirms Finning International Inc. at BBB (high), Trend Remains 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 BBB (high) and the Commercial Paper rating at R-2 (high). All trends remain Stable. The confirmation recognizes the Company’s solid and stable business risk profile. In addition, Finning’s financial profile, although weakened as expected, is still acceptable for the current rating. However, Finning’s financial risk profile has little cushion left to absorb further deterioration, and a lack of progress in reversing the current declining trend could lead to negative rating actions.

As anticipated, prices of commodities such as oil, copper and thermal coal, which are key economic drivers in Finning’s sales territories, remained weak through most of 2016. An unexpected month-long wild fire near Fort McMurray, Alberta, stopped/interrupted nearby oil sands operations, and the resultant reduced activities further depressed the more profitable product support business in Canada. Nevertheless, the key coverage metrics -- the adjusted cash flow-to-debt and adjusted debt-to-EBITDA (as defined by DBRS) -- although weaker, were within the 20% and 3.5 times thresholds, respectively; failing to maintain coverage within those thresholds would have triggered negative rating actions as stated in DBRS’s last Finning press release, dated March 30, 2016.

Commodity prices have either stabilized or strengthened modestly recently, which is an encouraging sign. In September, mining product support activity in Canada also returned to normal levels, with the impact of the wild fire fading. Ongoing benefits from Finning’s cost reduction initiatives are another positive to earnings. DBRS expects stabilized market conditions and cost savings to strengthen Finning’s operating results modestly in 2017. Furthermore, Finning has strong liquidity ($460 million in cash and $1.0 billion in unused committed bank lines at the end of September 2016). Despite weak operating results, Finning generated solid free cash flow in 2016, and DBRS expects the same in 2017. If not for the high redemption premium, Finning could have used its cash to retire the $350 million notes, which mature on June 1, 2018, and restore its financial profile to within the current rating range.

Finning has strong market position in its designated sales territories and a favourable sales mix with a significant portion in the more profitable product support business. Finning actually gained share in the construction market and improved customer satisfaction in its Canadian region during the current challenging environment. DBRS notes that the commodity cycle will turn positive, although the timing is uncertain. With its strong market position and geographic and product diversification, Finning is well placed to benefit from the eventual recovery in its sales territories.

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 methodology is Rating Companies in the Capital Goods Dealership Industry (June 2016) and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2016), which can be found on our website under Methodologies.