PrefBlog

Standard & Poor’s has announced:

• •We are lowering our long-term corporate credit rating on RONA Inc. to ‘BB+’ from ‘BBB-‘.
• •We are also lowering our issue-level rating on the company’s senior unsecured debt to ‘BB+’ from ‘BBB-‘ and assigning a ‘4’ recovery rating reflecting average (30%-50%) recovery in the event of a default.
• •The downgrade follows our view of RONA’s continuing weak profitability, which pressures the company’s financial risk profile.
• •We believe that persistently intense competition and the company’s strategic repositioning will constrain profitability in 2013 and 2014.
• •The stable outlook reflects our expectation that a modest increase in home improvement spending combined with cost reductions should enable the company to reverse its earnings declines, but this is exposed to the risks inherent with resizing stores, refocusing other businesses, and making significant staff reductions.

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At the same time, Standard & Poor’s lowered its rating on the company’s global-scale preferred shares to ‘B+’ from ‘BB’ and on its Canada-scale preferred shares to ‘P-4(High)’ from ‘P-3’, reflecting the three-notch separation from the speculative-grade long-term corporate rating.
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The stable outlook on RONA reflects our expectation that a modest increase in home improvement spending combined with cost reductions should enable the company to reverse its earnings declines, potentially reducing leverage to below 3.5x as lease-adjusted debt declines slowly along with the company’s shrinking footprint. We are assuming that the company’s strategic repositioning and cost reductions contribute to a modest improvement in earnings in 2013, notwithstanding the risks inherent with resizing stores, refocusing other businesses, and making significant staff reductions.

We could lower the rating if RONA’s earnings continue to decline, which would be a further indicator of its weakened position in this highly competitive sector. We expect that such a scenario would be characterized by stagnant to
declining revenue and same-store sales, adjusted EBITDA margins remaining below 5.5%, and leverage remaining persistently above 3.5x.

The prospects for an upgrade are limited in the near term, considering the intensity of competition in the soft Canadian home improvement market, as well as RONA’s shifting strategic priorities.

RON.PR.A was last mentioned in PrefBlog when it got hammered in the wake of the DBRS downgrade to Pfd-4(high), Trend Negative

RON.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

This entry was posted on Friday, April 12th, 2013 at 6:39 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.