DBRS Confirms Toromont Industries at BBB

DBRS has today confirmed the rating of Toromont Industries Ltd.’s (Toromont or the Company) Senior Unsecured Debentures at BBB, with a Stable trend, removing the rating from Under Review with Developing Implications, where it was placed on October 19, 2009. The confirmation follows the successful acquisition of 96% (which includes trust units already owned by Toromont) of the outstanding trust units and exchangeable limited partnership units of Enerflex Systems Income Fund (Enerflex). The final purchase price of $14.25 per Enerflex unit is marginally above the original offer of $13.50 per unit that was first proposed in October 2009. The terms of the transaction are in line with DBRS’s expectations and underpin the rating confirmation (see DBRS press release dated October 19, 2009, for additional details).

Toromont plans to redeem the remaining exchangeable units of Enerflex Holdings Limited Partnership and to acquire all of the remaining outstanding trust units of Enerflex on the same terms as the units acquired under the offer, with the acquisition expected to be completed in late February.

Toromont’s financial and business profiles remain within the range of acceptability for the rating despite a modest negative impact from the transaction. Toromont will fund the purchase of the units with 50% equity and 50% cash (funded with debt) – consistent with DBRS’s expectations. New debt of $450 million will be used to fund the cash portion of the offer, transaction costs and the repayment of Enerflex’s outstanding indebtedness. This will leave Toromont with solid cash balances. The overall purchase price is estimated at $680 million, as per Toromont’s revised offer to purchase dated January 7, 2010.

Toromont’s pro-forma financial profile is still in line with the rating despite the weakening in the Company’s credit metrics. DBRS notes that leverage and coverage ratios at September 30, 2009, were strong for its BBB rating, and the Company’s low debt position provided sufficient flexibility to complete the purchase and maintain an acceptable capital structure. On a pro-forma basis at September 30, 2009, gross debt-to-capital (DBRS adjusted for operating leases) is in the mid-30% range, debt-to-EBITDA is below 2.0 times, and cash flow-to-debt is roughly 0.4 times – all within the range of acceptability for the rating. Furthermore, DBRS expects that free cash flow generation would be used toward debt repayment, given the Company’s historically conservative approach to leverage.

The Company’s business profile risk has increased due to greater exposure to the natural gas industry, which has historically been volatile, but remains acceptable for the rating. This risk is partially offset by enhanced geographic diversification outside of North America and improved size and scale. The acquisition will also improve the Company’s mix of after-sale services (which is typically less cyclical than sales of equipment and natural gas compression packages).

Enerflex is a leading player in the natural gas compression market, with roughly $1 billion in annual revenues, 60% of which are well diversified outside of Canada (notably in Australia). Enerflex’s operating margins are similar to those of Toromont and it has been consistently profitable through the business cycle. In addition, Enerflex has historically maintained a relatively conservative capital structure.

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

The applicable methodology is Rating Capital Goods Dealers, which can be found on the DBRS website under Methodologies.

This is a Corporate rating.

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

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