DBRS Downgrades AIM To Pfd-5(high)

DBRS has announced that it:

has today downgraded Aimia Inc.’s (Aimia or the Company) Issuer Rating and its Senior Secured Debt rating to BB (low) from BBB (low), and has assigned a recovery rating of RR4 to the Senior Secured Debt. DBRS has also downgraded the Company’s Preferred Shares rating to Pfd-5 (high) from Pfd-3 (low). The trends on all ratings have been changed to Negative from Stable. This rating action removes the Company’s ratings from Under Review with Negative Implications where they were placed on May 11, 2017, when Aimia announced that it had received a notice of contract non-renewal from Air Canada after the agreement’s expiration in June 2020. Since then, DBRS has had business and financial update meetings with management and reviewed the operational data released in the Company’s Q2 2017 results to update DBRS’s opinion of Aimia’s credit risk going forward.

The three-notch downgrade reflects Air Canada’s significance to Aimia as a coalition partner, combined with DBRS’s previous expectation that the non-renewal of the agreement with Air Canada was a low-probability scenario. DBRS believes that the loss of Air Canada as a coalition partner will result in lower engagement in the Aeroplan program, accelerated reward redemption as well as lower magnitude and significantly reduced predictability with respect to the Company’s gross billings, adjusted EBITDA and free cash flow profile going forward.

In its review, DBRS focused on Aimia’s: (1) evolving business risk profile without its largest redemption partner post-2020; (2) liquidity, including refinancing/repayment of upcoming 2019 and 2020 maturities; and (3) financial risk profile, including financial management intentions.

The Negative trend reflects continued uncertainty and concern about further declines in the Company’s revenue, adjusted EBITDA and free cash flow going forward. DBRS will continue to monitor Aimia’s customer engagement, reward redemptions and the competitive environment on a quarter-by-quarter basis. While the Company could use capital-conserving measures and/or asset sales to improve credit metrics through debt reduction, the revision of the trend to Stable would be more influenced by greater visibility in operating income and free cash flow as well as increased confidence in Aimia’s ability to meet its funding requirements, including the first debt maturity in May 2019. DBRS believes that the Company’s International Coalitions segment will be relatively unaffected by the loss of Air Canada as a partner, but does not expect a material increase in earnings from this segment to compensate for the expected decrease from the Americas Coalitions segment. DBRS expects Aimia to seek out other coalition partners to offset some of the effects from the loss of Air Canada. DBRS notes that the Company has not made any material announcements in this regard to date, but will evaluate the impact of any agreement if/when it is reached. Should mileage accumulation decrease and/or redemptions accelerate more than revised expectations, in the absence of new partnerships, divestitures and/or capital raises, further downgrades could result.

DBRS notes that an Issuer rating of BB (low) typically maps to a Preferred Shares rating of Pfd-4 (low). In this case, however, since Aimia did not pay its last declared preferred share dividend, DBRS further discounted the Preferred Share rating to Pfd-5 (high). DBRS notes that the Company was prohibited from paying the preferred share dividend because of the failure of a capital impairment test in the Canada Business Corporations Act, not because of insolvency.

Aimia’s ratings are based on the quality of the Company’s brands and its relationships with remaining key commercial partners. The ratings also consider the consumer response following the announcement of the termination of the Air Canada agreement, a heightening competitive environment and the significant degree of revenue concentration.

Affected issues are AIM.PR.A, AIM.PR.B and AIM.PR.C.

This follows the suspension of preferred share dividends by the company and the subsequent downgrade to P-4(high) by S&P.

The company stated in their 17Q2 Earnings Release:

Update on Dividends to Shareholders
  • • As communicated on June 14, 2017, the Company is prohibited from paying dividends declared on May 10, 2017, and originally scheduled to have been paid on June 30, 2017, as well as declaring any further dividends on any of the outstanding Common Shares or Preferred Shares, based on Aimia’s determination that the capital impairment test set forth in paragraph 42(b) of the Canada Business Corporations Act (the “CBCA”) would not be satisfied.
  • • Recognizing the need to preserve the Company’s financial flexibility, liquidity and capital resources in the coming years, the Board has further determined that the Company will not declare dividends on its Common Shares for the foreseeable future, irrespective of the capital impairment test.
  • • With respect to the Company’s Preferred Shares, dividends continue to accrue in accordance with their terms even if they are not declared.
  • • There can be no assurance that the Company will, at some future point in time, be in a position to pay the dividends previously declared and declare and/or pay any future dividends.

6 Responses to “DBRS Downgrades AIM To Pfd-5(high)”

  1. fed says:

    Since these preferred shares are cumulative, does that mean if they decide to pay dividends again, the ones that were not paid will be paid out to the holder at the time, or the new holder of the preferred share?

  2. jiHymas says:

    As far as I know, dividends in arrears will be paid to the holder at the time the arrears are paid.

    In other words, the ownership of the claim to prior dividends is bundled together with and indivisible from ownership of the shares.

    I come to this conclusion because dividends do not exist until they are declared. In addition, recreating the holdings of preferreds at some time in the past would be a nightmare, particularly since so many holders would have died, ceased doing business, etc. There would also be problems with taxation.

    However. the language of the prospectus does not specifically state this and I cannot find anything in the CBCA or OCA that specifically addresses this question.

    One website claims:

    Dividends cannot be declared payable in the past and this date must be either the same date of the resolution approving the dividend or for a future date.

    but does not provide an authority for this statement.

    In addition, I can’t recall a case of missed dividends actually being paid in the end that I could give you as an example.

    So there you have it – my opinion, backed up by nothing.

  3. hrseymour says:

    That’s how it works, and I have seen it work, in the US. If/when dividends are resumed there will be an ex-date for the payment of the accumulated dividends, or some fraction thereof. The accumulated dividends don’t have to be paid all at once. Preferreds trade dirty. Where it gets tricky in the US is the tax treatment. I believe that in the US missed cumulative dividends are technically taxable. I Googled this and here is an sample article that came up: http://lat.ms/2uE1N68

  4. fed says:

    Wow, that is crazy! Paying tax on money you did not get and may never get. Would be a nuisance to clear it up once the security is sold as well.

    Thanks for the info.

  5. adp4646 says:

    Don’t give T2 and his crew any ideas now 🙂 they could come up with something like:

    1. you could have earned 20K more last year if you had pushed yourself a little harder
    so let’s tax you on that
    2. your spouse did not work: well that person could have easily earned 30K
    so let’s tax you on that
    3. you have 2 kids in their teens that did not work, they could have easily
    earned 20K between the 2 of them
    so let’s tax you on that
    4. oh, and the cherry on the cake: the returns on your unregistered portfolio were below par,
    you could have easily doubled them
    so let’s tax you on that
    5. but wait, you are claiming a loss on one of your investments: you weren’t paying attention!
    no deduction allowed

  6. jiHymas says:

    adp4646, I’m not big fan of universal politicization bullshit and I find straw-man bullshit particularly annoying.

    Please keep it off PrefBlog.

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