DBRS Confirms Aeroplan at BBB with a Stable Trend

DBRS has today confirmed the Issuer Rating and Senior Secured Debt rating of Groupe Aeroplan Inc. (Aeroplan or the Company) at BBB and its Preferred Shares, Series 1 rating at Pdf-3, all with Stable trends. Aeroplan’s business and financial risk profiles have remained relatively steady despite challenging market conditions over the past year, the participation in the Air Canada financing and the closing of the Carlson Marketing Ltd. (Carlson Marketing) acquisition in late 2009. The Company’s credit metrics remain acceptable for its ratings and are likely to modestly improve over the near term.

Aeroplan’s ratings are underpinned by its leading market position in Canadian (Aeroplan Canada) and U.K. (the Nectar Program) loyalty marketing, with strong and long-term relationships with its key commercial partners and consistent free cash flow generation. Aeroplan Canada remains the largest source of sales and earnings. However, the Company has expanded mainly through the acquisition of Loyalty Management Group (LMG – part of Aeroplan Europe) in 2007 and Carlson Marketing in 2009. These acquisitions have notably enhanced Aeroplan’s coalition loyalty programs and international presence and will provide growth opportunities over the medium term. In addition, the Company strengthened its balance sheet in Q1 2010 with issuances of preferred shares (treated as equity) and extended its maturity profile with senior secured notes.

Proceeds from the issuances were used to repay borrowings under its credit facilities, which led to an improvement in its core leverage and coverage ratios (i.e., debt-to-adjusted EBITDA declined to 2.2 times from roughly 2.8 times at the end of 2009). Over the near term, DBRS expects Aeroplan to generate modest improvement in adjusted EBITDA (before non-recurring items), likely close to $300 million. Gross billings (from the sale of miles or points) are likely to increase in the low to mid-single digit range, mainly due to increased credit card spending and travel as the economy gradually strengthens from recessionary levels. In addition, average redemption costs and breakage (i.e., miles that have been sold but are not expected to be redeemed) are likely to remain relatively stable. Consolidated margins are expected to decline with the inclusion of Carlson Marketing (which is less profitable than Aeroplan Canada) but remain reasonable. Aeroplan is also expected to continue to generate free cash flow (before working capital), although higher capex in the range of $40 million will lead to a reduction from 2009 levels.

DBRS notes that Aeroplan remains acquisitive and its customer base is highly concentrated (with CIBC Visa being the largest client) despite recent success in diversifying its business. That said, large investments are not expected over the near term given the early stages of the Carlson Marketing integration and Nectar Italia start-up. DBRS expects the Company to keep debt-to-adjusted EBITDA in the range of 2.5 times to 3.0 times (reaching the higher end after future acquisitions). Furthermore, Air Canada remains of key importance to Aeroplan’s business (accounting for the bulk of miles redemptions in Canada). While Air Canada has had a volatile financial history, DBRS expects its relationship with Aeroplan to remain stable. DBRS believes that the risks and volatility in Air Canada’s operations are not likely to have a material impact on Aeroplan’s performance, as demonstrated in 2003 when Air Canada filed for protection under the Companies’ Creditors Arrangement Act (CCAA) and, more recently, when the Company participated in the Air Canada financing in July 2009 (in which Aeroplan provided a $150 million loan).

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

The applicable methodologies are Consumer Products and DBRS Preferred Share and Hybrid Criteria for Corporate Issuers, which can be found on our website under Methodologies.

This is a Corporate (Transportation) rating.