DBRS Morningstar Confirms Transcontinental Inc. Issuer Rating at BBB (low), Stable Trend, and Discontinues Senior Unsecured Debt

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Transcontinental Inc. (Transcontinental or the Company) at BBB (low) with a Stable trend. The Senior Unsecured Debt has been discontinued as the notes have been repaid. The rating confirmation reflects the strong operating performance in the Packaging segment, while acknowledging softer than expected performance in the Print segment during F2019. The rating reflects Transcontinental’s continued strong market position in the Print industry, attractive outlook in the Packaging segment, diversified customer base and product offering, and strong free cash flow (FCF) generating capacity. The rating also continues to consider the structural shift from print to digital media and the risks associated with growth through acquisition.

Growth in Transcontinental’s F2019 reported revenue was driven by a material increase in Packaging revenue, which continued to benefit from the transformational $1.72 billion acquisition of Coveris that closed on May 1, 2018. However, the strong revenue performance in Packaging was partially offset by softer than expected top line performance in the Print segment.

Transcontinental’s leverage underperformed DBRS Morningstar’s expectations in F2019 as debt repayment during the year was below expectations. F2019 cash flow from operations was below expectations and capital expenditure came in higher than anticipated, which likely contributed to the timing of debt repayment. Having said that, DBRS Morningstar continues to believe the Company has the ability and willingness to materially ‘catch up’ to our initial F2020 leverage outlook over the coming year.

While reported revenue is expected to be down year over year in F2020 due to asset divestitures, DBRS Morningstar expects positive organic growth in the Packaging segment and modest growth in Print. Over the medium term, Transcontinental’s earnings profile should be positively impacted by the streamlining of the Company’s operations and ongoing cost saving initiatives.

In F2020, DBRS Morningstar expects Transcontinental to use a portion of its FCF to repay debt in addition to allocating the net proceeds received from the paper asset divesture that closed on January 20, 2020. This magnitude of FCF should result in leverage metrics that are moving toward 2.0 times (x) over the near- to mid-term period (i.e., 12–18 months). While DBRS Morningstar acknowledges this timeline is longer than initially anticipated, F2019 proforma leverage for the Hood divestiture is estimated at 2.42x prior to any debt repayment from cash flow generated in F2020.

While DBRS Morningstar does not currently foresee a change in the rating, if lease-adjusted gross debt leverage (gross leverage) were to decline meaningfully for a sustained period amid steady profit growth, a positive rating action may occur. Conversely, if gross leverage were to increase materially for an extended period, operating performance were to deteriorate, and/or the Company were to pursue unfavourable acquisition(s), a negative rating action may occur.

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

The principal methodologies are Rating Companies in the Industrial Products Industry, Rating Companies in the Printing Industry, and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, 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 [email protected].

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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