DBRS Confirms Ratings on Finning International Inc. at BBB (high) and R-2 (high), Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Debentures and Medium-Term Notes rating of Finning International Inc. (Finning or the Company) at BBB (high) as well as its Commercial Paper rating at R-2 (high). All trends are Stable. The rating confirmations are primarily supported by the Company’s solid business profile. DBRS notes that Finning’s financial profile has weakened because of increased debt, primarily incurred to support seasonal working capital needs, but remains acceptable, albeit marginally, for the current ratings. DBRS expects the Company’s operating performance to maintain its current improving trend, despite headwinds in its sales territories (i.e., the impact from the China-United States trade dispute, Brexit, etc.), and its financial profile to strengthen in the last half of 2019 to support the current ratings and Stable trend.

The Company’s solid business profile continues to be the main support for the current ratings. Finning is the largest dealer in Caterpillar Inc.’s (CAT; currently rated “A” with a Stable trend by DBRS) global distribution network and a market leader in its sales territories. The Company’s business profile is modestly enhanced by its February 2019 acquisition of a small, but market-leading mobile on-site refueling company (4refuel) in Canada and Texas. Furthermore, Finning benefits from improved operating efficiency as a result of its restructuring efforts, which should strengthen its market position and boost profitability.

Finning’s operating profit (as defined by DBRS) for the first six months of 2019 was comparable to the same prior-year period and in line with DBRS expectations; however, working capital cash usage for the period was much higher than DBRS anticipated. A large increase in inventory, parts and service inventory in the Company’s South American operations and equipment inventory in its Canadian operations, as well as higher receivables caused by the timing of collections in the Canadian and South American operations, led to the higher cash usage. Funding the acquisition of 4refuel and share buybacks also added to the cash-flow deficit and the increase in debt. The resultant increase in debt levels at the end of June 2019 was much higher than DBRS anticipated. The debt-to-EBITDA ratio (as defined by DBRS) for the last 12 months ended June 30, 2019, weakened to 3.45 times (x) from 2.56x at the end of 2018. The Company’s weakened financial profile is marginally acceptable for the current ratings. Nevertheless, DBRS notes that Finning typically generates very strong cash flow in the last half of the year, especially the fourth quarter; as a result, DBRS anticipates the debt level to decline meaningfully toward the end of 2019.

DBRS expects the Company to maintain its improving trend in operating performance, supported by benefits from its restructuring efforts and, together with the anticipated decline in debt levels, to restore the financial profile to levels commensurate with the current ratings. DBRS would, however, consider taking negative rating actions if the Company’s financial profile does not improve as expected.

DBRS notes that the above press release was amended on October 15, 2019, to remove add a note about the previous rating action date. The amendment was minor and would not impact the understanding of the reader.

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

The principal methodologies are Rating Companies in the Capital Goods Dealership Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, 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 info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS 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 for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this transaction took place on September 7, 2018.

For further information on DBRS 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, Industrials & Natural Resources
Initial Rating Date: June 30, 1978

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada