Morningstar DBRS Changes Trends on Cooper Equipment Rentals Limited's Credit Ratings to Negative From Stable, Confirms Long-Term Issuer Rating at BB and Long-Term Senior Debt at BB (low)

DBRS Limited (Morningstar DBRS) changed the trends on all credit ratings of Cooper Equipment Rentals Limited (Cooper or the Company) to Negative from Stable and confirmed all credit ratings, including the Company's Long-Term Issuer Rating at BB and Long-Term Senior Debt credit rating at BB (low). This one-notch differential reflects Cooper's substantial balance sheet encumbrance, as the vast majority of assets are pledged under the Company's asset-based credit facility (the ABL Facility). The Company's Intrinsic Assessment (IA) is BB, and its Support Assessment is SA3, which reflects no expectation of timely external support and results in the Long-Term Issuer Rating being equalized to the IA.

KEY CREDIT RATING CONSIDERATIONS
The trend change to Negative from Stable reflects the significant increase in Cooper's already-high cash flow leverage, reflecting higher debt levels and weaker-than-expected financial performance amid a challenging operating environment. Moreover, the Negative trend also considers that 2025 will be another difficult year for earnings as pricing pressure and macroeconomic uncertainty persists.

Cooper's credit ratings are supported by its franchise as one of the largest equipment rental businesses in Canada, as well as an experienced senior management team with a high degree of industry knowledge. Additionally, the Company has a sound risk profile including modest credit risk, with asset risk and operational risk considered to be well managed. Morningstar DBRS views the Company's funding and liquidity profile as weak, with significant reliance on the ABL Facility, although it did somewhat diversify its funding mix through the issuance of senior unsecured notes in 2024.

CREDIT RATING DRIVERS
Given the Negative trend, a credit rating upgrade is unlikely. Morningstar DBRS would return the trend to Stable if Cooper demonstrates a notable improvement in cash flow leverage. The Long-Term Senior Debt credit rating would be equalized with the Long-Term Issuer Rating if asset encumbrance levels were reduced substantially.

Morningstar DBRS would downgrade the credit ratings if cash flow leverage remains elevated.

CREDIT RATING RATIONALE
Franchise Building Block Assessment: Good/Moderate
Founded in 1972, the Company has a well-established franchise in the Canadian equipment rental industry with a footprint of over 80 branches, up from 70 in the prior year, primarily located in Canada's largest provinces. Cooper has an estimated top-five market share within a mostly fragmented industry. With a customer base across a broad range of industries, the Company rents over 58,000 pieces of equipment, including skid-steer loaders, compact track loaders, boom lifts, scissor lifts, telehandlers, forklifts, excavators, wheel loaders, rollers, dozers, articulated dump trucks, air compressors, generators, pumps, compaction, lighting, trench shoring, and a broad range of other general rental equipment and tools. Cooper is majority-owned by SeaFort Capital Inc. (SeaFort), a Halifax-based investment company whose founding investors include two of Canada's wealthiest families.

Earnings Building Block Assessment: Moderate
Cooper's core earnings performance was relatively resilient in 2024 as adjusted EBITDA declined 3% year over year (YOY) to $163.2 million. This decline was driven by higher expenses and lower-than-expected revenue growth, which slowed significantly from prior years amid a challenging operating environment, including reduced construction activity, increased competition, and pricing pressures. Operating expenses excluding amortization and depreciation increased 17% YOY, below prior years but still above revenue growth of 9%, with increases across all expense categories, reflecting increased headcount, branches, and rental volume. Amortization and depreciation increased 22% from 2023, reflecting a 21% increase in average original equipment cost of the Company's rental fleet, while interest expense increased 32% to $53.2 million because of higher debt outstanding. As a result, Cooper reported an adjusted net loss of $27.4 million ($28.6 million net loss on an unadjusted basis), compared with a $15.2 million adjusted net income in 2023 ($15.7 million net loss on an unadjusted basis). Additionally, Cooper reported a net loss of $23.7 million in Q1 2025, compared with a net loss of $19.0 million in Q1 2024, while adjusted quarterly EBITDA was flat YOY at about $26 million. Morningstar DBRS expects that 2025 will be another difficult year for earnings as pricing pressure and macroeconomic uncertainty persists.

Risk Building Block Assessment: Moderate
Cooper maintains a sound risk profile, reflecting a moderate degree of credit risk, with asset risk and operational risk considered to be more relevant risks. Asset risk is well managed, as equipment is largely sourced from high-quality vendors and the Company employs a conservative depreciation approach, resulting in a fleet fair market value materially above net book value. While operational risk is moderated by the extensive industry experience of senior management and initiatives including a crisis management plan, various insurance policies, and telematics fleet coverage, Morningstar DBRS notes there is no formal risk management framework in place. Morningstar DBRS views the Company's levels of receivables written off as manageable, despite an increase in 2024 to $1.6 million, compared with $0.4 million in the prior year.

Funding and Liquidity Building Block Assessment: Weak
Morningstar DBRS views Cooper's funding and liquidity profile as weak. Funding remains relatively narrow in scope with a high reliance on the ABL Facility, although the Company somewhat diversified its funding mix in 2024 with a $250 million issuance of five-year senior unsecured notes. These funding sources are supplemented by capital leases and nominal vendor take-back loans. Liquidity is also highly reliant on the ABL Facility, with no additional credit facilities available; there is approximately $150 million in excess availability on the ABL Facility (taking into account borrowing base requirements). Net cash inflows from operating activities totalled $81.0 million in 2024, compared with $70.5 million in the prior year. The Company does not hold a cash balance as all cash collections are used to pay down the ABL Facility on a daily basis.

Capitalization Building Block Assessment: Weak
Adjusted cash flow leverage (i.e., debt/EBITDA) increased to 4.9x at December 31, 2024 and 5.0x at March 31, 2025, as calculated by Morningstar DBRS, up from 4.0x in 2023 because of the senior unsecured notes issuance and lower EBITDA. Leverage as reported by Cooper, which includes pro forma EBITDA for acquisitions, was 4.8x at year-end 2024 and Q1 2025, up from 3.8x at year-end 2023. This leverage level is well above Cooper's long-term target range of 3.0x to 3.5x, and the Company has very little cushion to its ABL Facility covenants. Additionally, the tangible common equity ratio was a very low 1.0% at year-end 2024, down from 8.7% in 2023, and fell further to negative 2.6% in Q1 2025, primarily driven by net losses and dividend payments which have reduced retained earnings, as well as a $20 million return of capital in 2024.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Governance (G) Factors
The following Governance factor had a relevant effect on the credit analysis: Morningstar DBRS views the Corporate Governance factor as relevant to the credit ratings, but it does not affect the assigned credit ratings or trends. The Company is governed by a board of directors totalling five members, including two Cooper executives and three nonexecutive members who are founders and partners of SeaFort. The lack of independent directors, as well as the absence of formal audit or risk committees, indicates a weaker corporate governance structure and is considered within the Franchise Strength and Risk Profile grid grades.

There were no Environmental or Social factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196.

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

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (November 19, 2024) https://dbrs.morningstar.com/research/443208. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at https://dbrs.morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings.

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

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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