AIM Downgraded To P-4(high), Watch Negative By S&P; Review-Negative by DBRS

S&P has announced:

  • •We are lowering our long-term corporate credit rating on Montreal-based Aimia Inc. to ‘BB+’ from ‘BBB-‘, reflecting our view of the risks to the company’s business and cash flow prospects following Air Canada’s notice to not renew its contract with Aimia when the current agreement expires June 30, 2020.
  • •We are also lowering our global scale rating to ‘B+’ from ‘BB’ and our Canada scale rating to ‘P-4(High)’ from ‘P-3’ on the company’s preferred shares.
  • •The ‘BBB-‘ issue-level rating on the company’s C$450 million senior secured debt outstanding is unchanged, reflecting our expectation of substantial recovery (70%-90%, rounded estimate 80%) in a default scenario. As such, we are assigning a ‘2’ recovery rating to the secured notes.
  • •At the same time, we are placing all our ratings on Aimia on CreditWatch with negative implications.
  • •The CreditWatch listing reflects the potential that we could lower the ratings on the company by one or more notches. We expect to resolve the CreditWatch placement within the next couple of months following our review of Aimia’s plans.

The Aeroplan program drives a significant portion of Aimia’s EBITDA and cash flow, and we believe the announcement increases the risk that gross billings will decline and redemptions increase through 2020. We believe this structural change could materially weaken the company’s medium-term cash flow and growth, and raise significant uncertainty about the company’s long-term outlook for sustained growth and profitability, factors that do not support an investment-grade rating, in our opinion.

The CreditWatch listing reflects the risk that we could lower our ratings on Aimia by one or more notches. We expect to resolve the CreditWatch placement within the next couple of months following our review of Aimia’s plans to manage potentially rising reward redemptions; mitigate potentially lower attractiveness of the Aeroplan program to its members; and, more important, demonstrate sufficient liquidity, financial flexibility, and capital market access to support Aimia’s debt obligations and address investments required to transition the business.

On May 11, DBRS announced that it:

has today placed Aimia Inc.’s (Aimia or the Company) Issuer Rating and Senior Secured Debt rating of BBB (low) as well as its Preferred Shares rating of Pfd-3 (low) Under Review with Negative Implications. The action follows the Company’s announcement that it has received a notice of contract non-renewal from Air Canada after the agreement’s expiration in June 2020. DBRS notes that the existing agreement and Air Canada’s purchasing commitments to Aimia remain in place until June 2020.

The Under Review with Negative Implications status reflects Air Canada’s importance to Aimia as a coalition partner and DBRS’s previous expectation that the agreement with Air Canada would be renewed, albeit on less favourable terms to Aimia. Furthermore, consumers’ reaction to this announcement, including the potential for lower engagement in the Aeroplan program and accelerated reward redemption, creates additional uncertainty going forward regarding the Company’s revenue, adjusted EBITDA and free cash flow profile (particularly with a lack of clarity on future dividend payments). Consequently, there is an increased risk in the ability to repay and/or refinance the $250 million of Senior Secured Notes due May 2019 as well as amounts outstanding on the revolving credit facility, which matures in April 2020. As such, DBRS believes that Aimia’s credit risk profile may no longer be consistent with an investment-grade rating, even if current credit metrics are maintained.

While a negative rating action is likely required, the degree of such an action will follow DBRS’s ongoing review with management, which will focus on (1) the potential impact on the business risk profile following the loss of Air Canada as a coalition partner; (2) the Company’s longer-term business strategy, including plans to maintain customer engagement and find a new airline partner(s), (3) the Company’s liquidity, including refinancing of upcoming 2019 and 2020 maturities; and (4) Aimia’s financial management intentions and dividend policy going forward. DBRS notes that in today’s release Aimia stated that going forward dividends would be linked to free cash flow. DBRS will seek greater insight on these issues to resolve the Under Review status of the ratings as soon as possible.

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

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