DBRS Limited (DBRS Morningstar) confirmed McCain Foods Limited's (McCain or the Company) Issuer Rating at A (low). DBRS Morningstar also confirmed McCain Finance (Canada) Limited's Commercial Paper and Senior Unsecured Debentures ratings at R-1 (low) and A (low), respectively. All trends are Negative. These rating actions remove the ratings from Under Review with Negative Implications where they were placed on April 14, 2020. The Negative trend reflects DBRS Morningstar's view that the varying measures implemented globally in response to the Coronavirus Disease (COVID-19) pandemic will cause near-term stress on McCain's foodservice channel, which generates approximately half of its operating income; and that potential concerns about the virus and its after-effects on consumer behavior in the near to medium term, coupled with a weaker macroeconomic environment, could pressure the Company's earnings profile in the medium term. As such, DBRS Morningstar is concerned that McCain's earnings profile could deteriorate beyond the level considered appropriate for the current A (low) rating.
DBRS Morningstar's confirmations of McCain's and McCain Finance (Canada) Limited's ratings on April 24, 2019 were based on the expectation that credit metrics would remain strong for the current rating category (i.e. debt-to-EBITDA below 1.5 times (x)). At that time, DBRS Morningstar noted that the ratings could be pressured if leverage increased above 1.5x for a sustained period as a result of weaker-than-expected operating income and/or more aggressive financial management.
While McCain's earnings improved modestly in the last 12 months ended March 31, 2020 (Q3 F2020), DBRS Morningstar estimates that the restrictions placed on on-site dining and the enforcement of stay-at-home orders had a material, negative impact on the Company's Q4 F2020 results such that full-year F2020 earnings declined below F2019 levels.
Looking ahead to F2021, DBRS Morningstar expects the coronavirus pandemic to continue to challenge the recovery of McCain's earnings. Volumes are expected to remain pressured by a decline in the foodservice channel because of ongoing restrictions on on-site dining, which could more than offset higher retail channel volumes and the gradual recovery in the fast-food/quick-service restaurant channel. These declines would significantly affect EBITDA. DBRS Morningstar also believes that pricing constraints stemming from excess industry capacity and/or competitive pressure and a change in mix from curtailed consumer spending could more than offset benefits from the Sustainable Cost Advantage and other cost-saving initiatives, thereby further stressing earnings in the near term. While McCain's earnings should begin to improve as stay-at-home orders are gradually eased/lifted, potential concerns with the virus and its after-effects on consumer behavior in the near to medium term, coupled with a weaker macroeconomic environment, could continue to pressure earnings. As such, DBRS Morningstar believes that the Company could be challenged to recover earnings to pre-coronavirus levels in the medium term.
In terms of the Company's financial profile, DBRS Morningstar forecasts that McCain will be free cash flow negative in F2021, despite an anticipated decrease in capital expenditure and returns to shareholders to preserve capital. Consequently, debt-to-EBITDA is forecast to temporarily weaken beyond the level considered appropriate for the current rating category, and could remain at these levels in the medium term should the Company be challenged to recover earnings to pre-coronavirus levels. Changing the trend to Stable would be influenced by stabilization and recovery in operating income rather than debt reduction. However, if McCain’s operating performance deteriorates beyond current expectations, a negative rating action could result, regardless of the capital-conserving measures the Company has undertaken to improve credit metrics through debt reduction.
McCain’s current ratings continue to reflect its position as a leading producer of frozen potato products globally, supported by its large-scale and efficient operations. The current ratings also acknowledge the Company’s material revenue concentration to potato products, as well as the commodity nature of the potato processing industry.
The adoption of IFRS 16 and the impact thereof on the credit metrics did not materially change DBRS Morningstar’s view of McCain’s overall credit risk profile.
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.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Consumer Products Industry (August 15, 2019), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020) 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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