DBRS Confirms Finning International Inc. at BBB (high) and R-2 (high), Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Debentures and Medium-Term Notes rating of Finning International Inc. (Finning or the Company) at BBB (high) as well as its Commercial Paper rating at R-2 (high). All trends are Stable. The confirmation reflects Finning’s performance in line with expectations and the combination of the Company’s business and financial risk profiles remaining consistent with its current ratings.

As anticipated, improved markets conditions, especially in the construction sector, in Finning’s sales territories led to higher new-equipment shipments and steady growth in product-support revenue. Benefits from cost-reduction and productivity initiatives raised profitability at a faster pace than revenue in 2017 and through the first half of 2018. Additionally, the early redemption of debt in October 2017 accelerated the improvement in all key credit metrics. Finning is making solid progress in restoring its financial profile, which was weakened by the downturn in 2015/2016.

The Company’s stable business profile remains the key support for the current ratings. Finning is the largest dealer in Caterpillar Inc.’s (rated “A,” Stable trend, by DBRS) global distribution network and a market leader in its sales territories. The Company’s ongoing efforts to improve efficiency in its operations and working-capital management, its investment in digital capabilities and efforts to enhance its supply chain will increase its competitiveness. DBRS expects Finning’s business profile to strengthen gradually over the medium term.

DBRS expects conditions to remain positive in Finning’s markets and revenue and operating profits to improve steadily through to 2019; however, DBRS expects further improvement in all key credit metrics to be modest with a lack of meaningful debt-reduction opportunities before 2020. DBRS notes that the Company faces risks in the escalation of trade tension between the United States and China, the lack of a trade agreement between the United States and Canada to replace the North American Free Trade Agreement and a weakening economy in Argentina. Nevertheless, Finning’s financial profile has a cushion which can absorb a moderate deterioration in its operating results and maintain the current ratings; therefore, DBRS expects the ratings to remain stable over the next few years.

DBRS would consider taking positive rating actions if the Company’s key credit metrics strengthen meaningfully to the high end of the “A” rating range. This could be evidenced by sustaining the adjusted debt-to-EBITDA ratio (as defined by DBRS) at well below 2.0 times (x) versus 2.5x in the last 12 months ended June 30, 2018. DBRS notes that it will be challenging for the Company to strengthen its financial metrics materially without meaningful debt reduction. Conversely, DBRS would consider taking negative rating actions if Finning suffers a prolonged deterioration in its credit metrics to the low end of the BBB rating range.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Capital Goods Dealership Industry (May 2018) and the DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2018), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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

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