DBRS Confirms Transcontinental Inc. at BBB (low), Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and the Senior Unsecured Debt rating of Transcontinental Inc. (Transcontinental or the Company) at BBB (low) with Stable trends. The rating confirmations reflect the positive impact of the transformational Coveris Americas (Coveris) acquisition on the Company’s earnings profile while acknowledging a heightened level of acquisition-related leverage at this time. The ratings reflect Transcontinental’s strong market position in the Printing segment, attractive outlook in the Packaging segment, diversified customer base and product offering and strong free cash flow (FCF)-generating capacity. The ratings also continue to consider the structural shift from print to digital media and the risks associated with growth through acquisition.

As expected, Transcontinental’s earnings have benefited from the transformational $1.72 billion acquisition of the assets of Coveris, which more than offset the impact of low-return media asset divestitures through the year and softness in the Printing segment. EBITDA margins declined modestly year over year, primarily reflecting the impact of the lower-margin Coveris business on Packaging segment margins and a modest decline in reported Printing segment margins, partially offset by the vastly improved Media segment margins that benefited from the sale of low-margin assets.

As expected, Transcontinental’s financial profile weakened materially as a result of debt-financed acquisition activity during the year. Having said that, the leverage profile has performed in line with DBRS’s expectations through year-end F2018 and DBRS continues to believe that the Company has the ability and willingness to delever to a range more appropriate for the ratings based on its strong FCF-generating capacity and prudent financial management. On a reported basis, DBRS’s lease-adjusted debt-to-EBITDA and DBRS’s lease-adjusted EBITDA coverage ratio weakened to 2.71 times (x) and 11.9x, respectively, in F2018, compared to 1.18x and 16.3x, respectively, in F2017. Excluding the impact of the Hearst agreement, leverage DBRS estimates F2018 year-end lease-adjusted debt-to-DBRS EBITDA and lease-adjusted DBRS EBITDA coverage ratio of 3.36x and 9.62x, respectively.

DBRS expects Transcontinental’s earnings profile to continue to be positively affected by acquisition activity. Earnings are expected to be driven primarily by the Coveris acquisition and the realization of acquisition-related cost synergies that should result in positive margin leverage in the Packaging segment, partially offset by margin pressure in the Printing segment.

Transcontinental’s financial profile is expected to improve through F2019 and F2020 as the Company uses the majority of its FCF to reduce debt post the Coveris acquisition. While the pace of deleveraging will likely be modestly slower than initially contemplated, the Company has both the capacity and willingness to delever to at least 2.0x to 2.5x over the next 18 months, which is sufficient to maintain the current ratings.

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

The principal methodologies are Rating Companies in the Publishing Industry, Rating Companies in the Printing Industry and Rating Companies in the Industrial Products Industry, which can be found on dbrs.com under Methodologies & Criteria.

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.

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.

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.

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