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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Debentures and Medium-Term Notes rating of Finning International Inc. (Finning or the Company) at BBB (high) and the Company's Commercial Paper rating at R-2 (high), all with Stable trends. Finning's operating results and key credit metrics weakened in H1 2020 because of a sharp deterioration in conditions in all of its sales regions caused by lockdowns to control the spread of the Coronavirus Disease (COVID-19). Nevertheless, the Company's credit profile (a combination of its business profile and financial profile) remains acceptable for the current ratings despite weaker debt coverage ratios. Furthermore, DBRS Morningstar expects the Company's operating results to start recovering in Q4 2020 and restore the key debt coverage ratios to within the current rating range toward the end of 2021.

The Company's solid business profile provides the key support for the current ratings. Finning is the largest dealer of Caterpillar Inc. (rated “A” with a Stable trend by DBRS Morningstar) equipment in the world and has a leadership position in all its sales territories. The Company's sizeable product services business, which is higher margin and less volatile, has helped to moderate the impact of an economic downturn on its operating results. Furthermore, Finning has been actively restructuring its operations to improve its operating efficiency and the benefits from these actions should improve its competitiveness.

Actions taken by governments to control the spread of the coronavirus depressed economic activities and severely curtailed mining activities in Finning's sales territories in H1 2020. Additionally, the lockdown further deepened the decline in the demand for oil, adding to the stress on an already weak oil sands industry in Western Canada, Finning's major market. Despite taking actions to adjust to the deteriorating market conditions, Finning reported a meaningful decline in net revenue and operating profits in H1 2020 compared with the same period with the most severe impact in Q2 2020. Lower operating results weakened all the key credit metrics.

DBRS Morningstar, in its base-case scenario, assumes that economic conditions in all of Finning's sales territories bottom in Q2 2020, stabilize in Q3 2020, and improve progressively starting in Q4 2020 through 2021. Under this scenario, DBRS Morningstar anticipates operating results at Finning to stage a recovery in Q4 2020 and gain momentum through 2021. However, all key credit metrics are expected to be weaker in 2020 compared with 2019. Nevertheless, DBRS Morningstar expects Finning's operating results to strengthen through 2021 and Finning's financial profile to be commensurate with the current rating toward the end of 2021.

DBRS Morningstar expects the ratings to remain stable in the near term. However, there is still uncertainty regarding the duration and severity of the coronavirus pandemic and the occurrence of a second wave of infections could worsen operating results in H2 2020 and delay the recovery at Finning. DBRS Morningstar would take negative rating action if Finning's financial profile does not make steady progress and recover by the end of 2021, as assumed in DBRS Morningstar's base-case scenario. Furthermore, DBRS Morningstar does not anticipate taking any positive rating action in the near term in view of the challenging market conditions.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

DBRS Morningstar notes that the above press release was amended on September 11, 2020, to include a description of the rating aspect that each principal methodology addressed. The amendment was minor and would not impact the understanding of the reader.

Notes:
The principal methodologies are Rating Companies in the Capital Goods Dealer Industry (May 6, 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbanks Issuers (March 10, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

This rating is endorsed by DBRS Ratings Limited (DBRS Morningstar) for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, “Rating Companies in the Capital Goods Dealer Industry” (May 6, 2020) was the primary rating methodology applied in determining the rating of Finning International Inc. “DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships” (November 25, 2019) was applied to assess the corporate structure of Finning International Inc. “DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers” (March 10, 2020) was applied to ensure that the provided liquidity in support of the Commercial Paper rating was consistent with DBRS Morningstar criteria.

The last rating action on this transaction took place on August 9, 2019.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Kam Hon, Managing Director, Global Corporates
Rating Committee Chair: Charles Halam-Andres, Managing Director, Global Corporates
Initial Rating Date: June 30, 1978

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

DBRS Limited
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-- Rating Companies in the Capital Goods Dealer Industry (May 6, 2020) https://www.dbrsmorningstar.com/research/360675/rating-companies-in-the-capital-goods-dealership-industry
-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019)
https://www.dbrsmorningstar.com/research/353260/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbanks Issuers (March 10, 2020) https://www.dbrsmorningstar.com/research/357788/dbrs-morningstar-criteria-commercial-paper-liquidity-support-for-nonbank-issuers