DBRS Confirms Finning International Inc. at BBB (high), Trend Remains Stable

DBRS Limited (DBRS) 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 reflects that Finning has performed broadly in line with expectations with improved operating results in the first half of 2017. More encouragingly, the improving trend appears to be gathering momentum, with the Company raising its revenue guidance for 2017, from flat to modestly over 5%. DBRS expects the key metrics to continue to strengthen and the ratings to remain stable in the near to medium term.

Customers’ retrenchment actions in response to weak commodity prices depressed the demand for equipment, as well as parts and services, and weighed on Finning’s performance in the last few years. Since the latter part of 2016, product support revenue has started to recover as customers can no longer defer much-needed maintenance work. In H1 2017, stronger equipment sales in South America and the United Kingdom & Ireland (U.K. & Ireland) and rising product support revenue in all operations boosted overall revenue, and adjusted EBITDA (as defined by DBRS) showed an even stronger improvement aided by additional benefits from cost reductions and efficiency gains.

DBRS expects operating results at Finning to show gradual improvement supported by still-positive market fundamentals in its sales territories and benefits from cost savings and productivity improvement. Potential increases in infrastructure spending, growing product support business, construction equipment demand in South America (especially Argentina) and power equipment demand in U.K. & Ireland provide a solid foundation for revenue growth. Furthermore, commodities (except crude oil and natural gas) prices are trending up, and the mining companies are in better financial conditions to fund new capital projects. The recovery in the mining sector will be an additional growth driver. However, the uncertainties associated with geopolitical events such as Brexit in the U.K. and the upcoming election in Chile will weigh on revenue growth in the near term.

The Company has also announced that it plans to prepay a portion of the $350 million debt maturing in June 1, 2018, with cash on hand. This deleveraging action, coupled with modestly improving operating results, should strengthen all key metrics and help build up some cushion in Finning’s financial profile to absorb unexpected deterioration in operating performance and support a stable rating in the near to medium term. Nevertheless, DBRS would consider taking positive rating actions if all key metrics can return to and be sustainable at near the 2014 levels. Conversely, an unexpected sharp deterioration in key credit metrics to weaker than the 2015 levels would lead to negative rating actions.

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 (May 2017) and the DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017), which can be found on our website 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.

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@debr.com