DBRS Confirms RTL-Westcan’s Ratings, Changes Trends to Negative

DBRS has today confirmed the Issuer Rating of RTL-Westcan Limited Partnership (RTL-Westcan or the Company) at B (high) but has changed the trend to Negative from Stable. The trend change reflects a much weaker than expected operating performance and debt coverage metrics in fiscal 2010 (year ending October 31) and the uncertainty of a full recovery in the near term. Pursuant to DBRS’s leveraged finance rating methodology, DBRS has also confirmed the recovery rating of RR3 and an associated BB (low) rating of the Company’s Senior Secured Debt. The trend on the Senior Secured Debt has also been changed to Negative from Stable.

On April 7, 2010, RTL-Westcan completed the acquisition, funded with cash and stock, of all the assets and liabilities of ECL Transportation Ltd (ECL) for about $11.8 million. The acquisition has made RTL-Westcan the leader in propane hauling and further solidified its strong position in the bulk commodity hauling market in western Canada. With a stronger market position, DBRS had expected a higher EBITDA in F2010. However, operating results at the hauling division, RTL-Westcan’s largest business, did not perform as expected. The hauling division reported a more than 10% decline in EBITDA on a year-over-year basis, impacted by integration issues and some negative market developments. Increased labour costs associated with higher than expected turnover in former ECL drivers and lower freight volume and weight loads due to adverse weather conditions were the key contributors to the decline. Weaker results at the hauling division led the Company to report a loss (before non-recurring items) in F2010.

Near term, the Company could benefit from some positive market developments. Ongoing strong demand for commodities from Asia is expected to support good economic growth in the western provinces, translating into more business for the Company’s customers and consequently more hauling trips. In addition, the restart of construction projects postponed by poor weather in the prior year should also add to revenue. The Company is also on track to realize synergies from the acquisition of ECL. However, there are still significant headwinds facing the Company. Even though the Company has taken actions to address driver turnover, there is uncertainty over whether RTL-Westcan has the capacity to take advantage of the increasing demand. The availability of drivers remains tight in western Canadian. In addition, revenue from postponed projects is still vulnerable to weather conditions and may not materialize. Hence, it is uncertain that the Company will be profitable in F2011.

DBRS had expected the Company’s debt coverage metrics to remain relatively stable in F2010 with stronger operating results mitigating the impact of higher debt levels associated with the acquisition of ECL. However, all debt coverage metrics were much weaker than expected due to lower operating results. The Company’s financial risk profile is aggressive for the current rating. Even though DBRS believes that the Company’s operating results are likely to show improvement, it is uncertain that the Company can overcome the headwinds and restore the credit metrics. The trend would likely be changed to Stable if the Company is able to restore profitability and credit metrics to more acceptable prior levels over the course of F2011 and demonstrate that the type of unexpected performance witnessed in F2010 will not easily reoccur. Failure to achieve such would likely lead to a downgrade to the ratings.

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

The applicable methodology is Rating Companies in the Transportation Industry, which can be found on our website under Methodologies.