DBRS Places Aimia Inc. Under Review with Negative Implications

DBRS Limited (DBRS) has today placed Aimia Inc.’s (Aimia or the Company) Issuer Rating and Senior Secured Debt rating of BBB (low) as well as its Preferred Shares rating of Pfd-3 (low) Under Review with Negative Implications. The action follows the Company’s announcement that it has received a notice of contract non-renewal from Air Canada after the agreement’s expiration in June 2020. DBRS notes that the existing agreement and Air Canada's purchasing commitments to Aimia remain in place until June 2020.

Aimia’s ratings were based on the strength of the Company’s brands and its strong relationship with key commercial partners. The ratings also considered Aimia’s exposure to consumer spending and redemption patterns amidst a heightening competitive environment, as well as the significant degree of revenue concentration. For the last 12 months (LTM) ended March 31, 2017, the Company’s gross billings and adjusted EBITDA have deteriorated moderately to approximately $2.3 billion and $226 million, respectively, from $2.5 billion and $236 million in 2015. Based on Aimia’s $450 million of debt, the adjusted debt-to-EBITDA ratio stood at 2.0 times (x) for the LTM ended Q1 2017, which DBRS believed was appropriate for a BBB (low) rating.

Air Canada is one of Aimia’s largest customers, representing approximately 13% of gross billings in Q1 2017 and 11% in 2016. Air Canada, including other Star Alliance partners, is by far the Company’s largest redemption partner, representing approximately 60% of the total cost of rewards in Q1 2017 and 47% in 2016.

The Under Review with Negative Implications status reflects Air Canada’s importance to Aimia as a coalition partner and DBRS’s previous expectation that the agreement with Air Canada would be renewed, albeit on less favourable terms to Aimia. Furthermore, consumers’ reaction to this announcement, including the potential for lower engagement in the Aeroplan program and accelerated reward redemption, creates additional uncertainty going forward regarding the Company’s revenue, adjusted EBITDA and free cash flow profile (particularly with a lack of clarity on future dividend payments). Consequently, there is an increased risk in the ability to repay and/or refinance the $250 million of Senior Secured Notes due May 2019 as well as amounts outstanding on the revolving credit facility, which matures in April 2020. As such, DBRS believes that Aimia’s credit risk profile may no longer be consistent with an investment-grade rating, even if current credit metrics are maintained.

While a negative rating action is likely required, the degree of such an action will follow DBRS’s ongoing review with management, which will focus on (1) the potential impact on the business risk profile following the loss of Air Canada as a coalition partner; (2) the Company’s longer-term business strategy, including plans to maintain customer engagement and find a new airline partner(s), (3) the Company’s liquidity, including refinancing of upcoming 2019 and 2020 maturities; and (4) Aimia’s financial management intentions and dividend policy going forward. DBRS notes that in today’s release Aimia stated that going forward dividends would be linked to free cash flow. DBRS will seek greater insight on these issues to resolve the Under Review status of the ratings as soon as possible.

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 principal methodologies are Rating Companies in the Consumer Product Industry and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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