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Rating Action:

Moody's assigns P-2 rating to Canadian Tire's commercial paper program

07 Jun 2019

Toronto, June 07, 2019 -- Moody's Investors Service ("Moody's") assigned a Prime-2 (P-2) short term rating to Canadian Tire Corp. Ltd.'s ("CTC") proposed senior unsecured commercial paper program. The outlook is stable. This is the first time Moody's has rated CTC.

CTC is establishing a $1 billion commercial paper program to be issued in the US market. The program will be backstopped by its committed C$1.975 billion revolving credit facility and will be supported by unrestricted same day availability of funds that can be drawn in Canadian or US dollars. Proceeds from the proposed program will be used for general corporate purposes.

Rating Assigned:

Senior Unsecured Commercial Paper: Assigned P-2

Outlook Action:

Outlook, Stable

RATINGS RATIONALE

CTC's P-2 commercial paper rating is based primarily upon its fundamental consolidated credit risk. CTC benefits from strong credit profiles in its Retail business and REIT subsidiary (CT REIT), while it is challenged by a weaker credit profile in its Financial Services business (Canadian Tire Bank, CTB), and by somewhat aggressive financial policies including high consolidated leverage. Moody's expects consolidated leverage to be sustained above 4x through 2020 (was 4.8x for LTM Q1/2019). CTC also has very good liquidity.

CTC's Retail business has strong Baa characteristics, benefiting from: 1) a diversified and unique mix of banners and products; 2) a strong Canadian presence with 1,693 stores as of March 30, 2019; and 3) a strong track record of comparable sales growth and consistent margins over many years despite competitive pressures from larger US retailers. CTC's Retail business is constrained by e-commerce technological risk from more advanced US retailers.

CT REIT has investment grade characteristics, benefiting from the largely unsecured nature of its assets and long term leases for more than 90% of its income, while it is challenged by a near-exclusive concentration of leases with CTC.

CTB exhibits non-investment grade characteristics, benefiting from: 1) an above peer-average capital ratio; 2) good margins; 3) adequate liquidity; 4) customer retention from a loyalty points program; and 5) close association with a strong retailer and a long-standing customer base, while it is constrained by: 1) unsecured credit card risk, 2) the undiversified nature of its assets; 3) lower asset quality than peers; and 4) higher levels of confidence-sensitive funding relative to industry.

CTC's Retail business has very good liquidity. Sources exceed C$1.4 billion while uses in the form of debt maturities total C$781 million for the next 12 months. Liquidity is supported by a committed C$1.975 billion revolving credit facility due in August 2023, which had availability of about C$1.3 billion at March 30, 2019, cash of C$65 million and between C$100 - $200 million of expected consolidated free cash flow for 2019. Moody's expects CTC to remain in compliance with financial covenants over the next 12 months

The stable outlook reflects Moody's expectation that with a well-established retail market presence and demonstrated strong execution abilities over time, CTC should continue to record growth in revenue and EBITDA over the next 12 to 18 months despite slowing global economic growth and ongoing competitive pressures.

For CTC's commercial paper rating to be upgraded to P-1, the company must demonstrate continued strong performance in all of its retail operations, sustain consolidated adjusted Debt/EBITDA towards 1.5x (4.8x for LTM Q1/2019) and EBIT/Interest above 10x (3.9x for LTM Q1/2019), and strategically reposition its Financial Services monoline focus to more diversified revenue and funding sources.

CTC's commercial paper rating could be downgraded to P-3 if a material weakening of liquidity occurs at any of its three business segments, if a material deterioration occurs in the bank's credit card portfolio quality or capital levels, if a deterioration in Retail market position occurs, reflected by sustained weakening of comparable sales and declining profitability or if it sustains consolidated adjusted Debt/EBITDA above 5x (4.8x for LTM Q1/2019) and EBIT/Interest below 4.5x (3.9x for LTM Q1/2019).

The principal methodology used in this rating was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Canadian Tire Corp. Ltd., headquartered in Toronto, Ontario, Canada, operates a family of businesses that include Retail, Financial Services and a Real Estate Investment Trust, which is a unique business model among the North American retailers Moody's rates. Revenue for the twelve months ended March 30, 2019 was C$14 billion (after intercompany eliminations).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Peter Adu, CFA
VP - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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