Debt rating agency Standard & Poor’s has downgraded the debt of troubled Rona Inc. to junk status, making it more expensive for the home improvement retailer to borrow money.
The agency said Quebec-based Rona’s continuing weak profits put pressure on the company’s financial risk profile.
“We believe that persistently intense competition and the company’s strategic repositioning will constrain profitability in 2013 and 2014,” S&P said in a release late Friday.
The agency said it lowered its long-term corporate credit rating on Rona to double-B-plus from triple-B-minus, with a stable outlook.
“The stable outlook reflects our expectation that a modest increase in home improvement spending combined with cost reductions should enable the company to reverse its earnings declines, but this is exposed to the risks inherent with resizing stores, refocusing other businesses and making significant staff reductions.”
S&P also lowered its issue-level rating on the company’s senior unsecured debt to double-B-plus from triple-B-minus and assigned a “4” recovery rating to the debt, reflecting average (30 per cent to 50 per cent) recovery in the event of a default. The recovery rating assignment is consistent with S&P’s rating approach for issuers with long-term corporate ratings of double-B-plus or lower.
At the same time, S&P lowered its rating on the company’s global-scale preferred shares to B-plus from double-B and on its Canada-scale preferred shares to P-4 (high) from P-3, reflecting the three-notch separation from the speculative-grade long-term corporate rating.
“We base the downgrade on our view of continuing weak profitability that pressures the company’s financial risk profile,” said S&P’s credit analyst Donald Marleau.
The ratings on Rona reflect the agency’s view of the intense competition in the Canadian home improvement market, which exacerbates economic cycles during periods of weak demand.
“Our rating also reflects the company’s weakened profitability that contributes to credit measures that are consistent with a speculative-grade rating,” S&P said.