DBRS Limited (DBRS Morningstar) placed the Issuer Rating of McCain Foods Limited (McCain or the Company) and the Senior Unsecured Debentures and Commercial Paper ratings of McCain Finance (Canada) Limited Under Review with Negative Implications. The rating action reflects DBRS Morningstar’s view that the Coronavirus Disease (COVID-19) pandemic will likely have a negative impact on McCain’s earnings profile, although the duration and extent thereof remains uncertain.
While McCain’s H1 F2020 (six months ended December 31, 2019) earnings remained stable year over year, the Company’s earnings for the remainder of F2020 will be negatively affected by the coronavirus pandemic. DBRS Morningstar anticipates that the Company’s topline for the remainder of F2020 will be pressured by the contraction in demand from food-service and fast-food channels due to the restrictions placed on onsite dining in its key operating markets, which will likely more than offset earnings growth from the retail channel. In the medium term, DBRS Morningstar believes that the Company could be challenged to recover earnings to historical levels, as it should face heightened pressure due to a weaker macroeconomic environment. EBITDA margins are expected to contract on account of McCain’s high operating leverage, which DBRS Morningstar anticipates will more than offset benefits from cost savings initiatives, thereby further pressuring operating income.
The decline in operating income and corresponding contraction in free cash flow generation would, in turn, weaken McCain’s financial profile and cause leverage to increase above 1.50 times. While the Company may use capital conserving measures to defend credit metrics through debt reduction, DBRS Morningstar notes that any future rating action will be more influenced by the degree of impact on operating income.
In its review, DBRS Morningstar will assess the duration, magnitude, and extent of the impact of the coronavirus pandemic on McCain’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.
The principal methodologies are Rating Companies in the Consumer Products Industry, DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships, DBRS Morningstar Criteria: Guarantees and Other Forms of Support, and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers, 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 firstname.lastname@example.org.
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.
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