Four companies that avoided the credit squeeze

By Sean Silcoff
Globe Investor Magazine Online, Nov. 10, 2008

This fall's credit market freeze has been particularly unkind to companies with high leverage, impending debt maturities and unfunded expansion projects. But what about those that got their financial houses in order before the freeze descended? They're sighing with relief. Here are four of them.





Jean Coutu Group (PJC) Inc.

Sometimes an embarrassing retreat can look brilliant in retrospect when circumstances change. Jean Coutu, the Montreal-based drug store operator, bet big in July 2004 when it bought 1,549 Eckerd drug stores in the United States for $2.5-billion (U.S.) from J.C. Penney Co. It funded the purchase mostly with borrowed money: the capital structure went from 35-per-cent debt to 89-per-cent and its operating cash flow-to-debt ratio fell to 0.09-times from 0.37.

The deal didn't improve Coutu, but rather threatened to sink it: Cash flow growth was tepid, sales fell, integration with Jean Coutu's other U.S. stores took longer and was more complicated than expected.

Founder and controlling shareholder Jean Coutu realized something had to be done. In August 2006 he struck a deal to cure the company's financial health, selling all 1,850 of his company's U.S. stores to Rite Aid Corp. Jean Coutu got $2.3-billion (U.S.) cash and 32 per cent of Rite Aid's stock when the deal closed in June 2007, two months before the credit crisis began.

Rite Aid stock has since collapsed, and Jean Coutu's 250-million shares are now worth a fraction of their original $1-billion value. But even the worst possible outcome for Rite Aid cannot harm Jean Coutu: the Canadian company's long-term debt is now just a puny 14 per cent of total capital, and it has been buying back stock. Better safe than sorry.

Bombardier Inc.

The plane and train maker had a runaway balance sheet five years ago, with $11.3-billion in debt. It was stuck in a downturn and at the mercy of a soaring Canadian dollar. Starting under then-CEO Paul Tellier, Bombardier reduced leverage through divestitures, an equity offering and by winding down its opaque finance division.

Sales of business jets skyrocketed, pushing up profits and cash flows. Bombardier managed to roll over and redeem debts and has no major maturities until 2012.

"The cautious management of our liquidity stemmed from the fact we didn't have the luxury to go knock on banks' doors," treasurer François Lemarchand said. "We're in a good position because we've been raised the last four years to eat what the company killed. We could only spend the cash we had."

Now Bombardier has net debt -debt of $4.4-billion (U.S.) less $4.3-billion cash-of just $100-million. Plus, if Bombardier is promoted to investment grade by rating agencies, it can get back $1-billion it posted as collateral on a credit facility. "You compare this to our situation in 2003 - it's night and day," says Mr. Lemarchand. "Frankly, our credit is better than it's ever been. We're better than many banks."

The company won't prematurely retire any debt, though, as the cycle is turning down and Bombardier faces a big pension deficit and funding commitments for planes in development.

"Our plans to return to investment grade are very clear, but they're in the drawer," says Mr. Lemarchand. "You want to preserve the cash for the crisis."

CAE Inc.

When former Bombardier CEO Robert Brown took over the Montreal flight simulator manufacturer in 2004, CAE, also affected by the aerospace downturn, was within striking range of breaching commitments to its lenders. Mr. Brown cut costs and improved efficiencies, such as reducing the amount of time it takes to make a simulator. He sold CAE's marine controls business, issued equity and paid down debt.

"Cash is what takes you through these periods," Mr. Brown said. So will the company's reduced reliance on the cyclical aerospace business, thanks to growth of its training and military divisions.

Today "CAE's financial position heading into a potential downturn is significantly better than it was going into the last downturn," said Versant Partners analyst Cameron Doersken in Montreal. Net debt has shrunk to $254.5-million (Canadian) from $575-million in 2004; factor in off-balance-sheet commitments, and its ratio of net-debt to total capitalization has shrunk to 28.6 per cent from 51.8 per cent. The ratio of net debt to EBIT (earnings before tax and interest) - a measure of financial flexibility - is now a conservative one times, down from five times-plus in 2004. CAE has an untapped credit line and ample room to cover the $173-million in debt maturing the next three years if it can't be extended.

Now, said Mr. Brown, CAE "can go on offence because of our strengths when others are weak." But, he cautioned, "With all of these things you can never be too sure of yourself."

Canadian Hydro Developers Inc.

The alternative energy leader took three years to develop a wind turbine farm project near Kingston, Ont., to the point where it could be fully financed. Luckily, the final piece of the puzzle - a $313-million increase in its credit facility - fell into place in June 2008, three months before credit markets froze. "Am I glad we [closed our financing] when we did?" said chief financial officer Kent Brown. "You bet. It would be silly to say otherwise."

With the money, Calgary-based Canadian Hydro is erecting the 86 windmill-Wolfe Island Wind Project, which should generate almost 600,000 megawatt hours a year, enough for 85,000 homes. The $450-million project should be completed by April.

Together with other projects under or nearing construction, Wolfe Island will increase Canadian Hydro's capacity by almost 150 per cent. "All of a sudden we have very significant cash flow to allow us to keep going," says Mr. Brown.

He believes had Canadian Hydro waited until fall, "we'd still be able to get the debt today [but] it would be a lot more expensive. It would be a cost we wouldn't want to incur."

That is, if funds were available at all. Last week, wind power developer Earth First Canada Inc. filed for creditor protection after it was unable to find debt financing for a project in B.C. Canadian Hydro "basically saw the window of opportunity for financing, took it, and now I think they're very glad they did," says Richard Talbot, co-head of global research for RBC Capital Markets.

Special to The Globe and Mail