DBRS Morningstar Places CanWel Building Materials Group Ltd. Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) placed CanWel Building Materials Group Ltd.’s (CanWel or the Company) Issuer Rating and Senior Unsecured Notes rating of B (high) Under Review with Negative Implications. The rating action reflects DBRS Morningstar’s view that the Coronavirus Disease (COVID-19) outbreak and the macroeconomic aftereffects will have a negative impact on CanWel’s earnings profile, although the duration and extent thereof remains uncertain.

DBRS Morningstar believes that, at least in the near term, CanWel’s revenues and operating income will be negatively affected by lower volumes as construction spending is curtailed and governments impose restrictions on construction and mandate some of CanWel’s customers—which include Lowe’s Companies, Inc. (rated BBB (high) with a Stable trend by DBRS Morningstar); The Home Depot, Inc. (rated “A” with a Stable trend by DBRS Morningstar); Home Hardware; and smaller chains, stores, and yards—to temporarily close locations fully or partially (e.g., curbside pickup only). That said, DBRS Morningstar notes that at least to date, CanWel’s end-customers’ businesses have been deemed essential in the majority of jurisdictions.

That said, more concerning to the rating are the potentially longer-lasting effects that the coronavirus outbreak will have on the economy, as CanWel’s products are used primarily in home construction, renovation, and remodelling. New home construction and, to a lesser extent, home renovation are cyclical in nature and are affected by a number of factors, including gross domestic product and unemployment. As such, DBRS Morningstar believes that CanWel’s revenues and operating income are likely to also be negatively affected over the near-to-medium term.

The degree to which operating income declines would in turn weaken CanWel's financial profile based on a corresponding contraction in cash flows and a deterioration of key credit metrics potentially to levels below what is considered acceptable for the current B (high) rating. While DBRS Morningstar acknowledges CanWel’s ability to curtail capital expenditure and dividends to preserve cash flow and liquidity, DBRS Morningstar notes that any rating action will be more influenced by the degree to which operating income is affected.

In its review, DBRS Morningstar will focus on assessing the duration, magnitude, and extent of the impact of the coronavirus outbreak on CanWel’s earnings profile and aims to resolve the Under Review status as soon as possible.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Merchandising Industry, Rating Companies in the Forest Products Industry including Appendix I – Timberland Operators, DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

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

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