DBRS downgrades Rona debt a notch to BB high; no longer considers it investment grade

Home improvement retailer Rona Inc.’s credit rating has been downgraded to below investment grade by DBRS amid the troubled Quebec company’s efforts to restructure its business.

The ratings agency said Tuesday that Rona’s continued deterioration in operating performance means its credit risk profile is no longer consistent with investment grade debt.

The competitive environment for Rona (TSX:RON) is looking increasingly difficult given Home Depot’s strong performance and rumblings from Lowe’s about expansion in Canada, DBRS added.

The agency downgraded the issuer rating, which speaks to the company as a whole, along with Rona’s senior unsecured debt to BB (high) from BBB (low). It also downgraded the company’s preferred share rating to Pfd-4 (high), or speculative, from Pfd-3 (low) and maintained its negative rating.

Last month, Rona announced plans to cut 200 full-time jobs across Canada and shrink its presence outside of Quebec as it seeks to rebuild a network that continues to underperform in the face of weak consumer demand.

The downsizing, which represents 15 per cent of its administrative positions, is part of the company’s plan to focus on its core businesses and reduce other holdings.

The Quebec-based company lost $17.9 million, or 15 cents per share, for the period ended Dec. 30, compared to a loss of $153.6 million or $1.19 per share a year earlier.

Revenues increased 2.2 per cent to $1.2 billion largely on an extra week of business in the quarter.

DBRS had confirmed Rona’s previous higher ratings last spring, pointing to the company’s restructuring plans as well as the change in capital structure undertaken with the early repurchase of debentures.

At that time, DBRS noted that if Rona was not successful in improving its credit metrics due to weakness in operating income or more aggressive than expected financial management or both, a downgrade would likely result.

Pointing to Rona’s 2012 full-year results, DBRS noted it was the third consecutive year of declining EBITDA (earnings before interest, taxes, depreciation and amortization) and EBITDA margins.

Shares in Rona closed down 21 cents to $11.05 Tuesday on the Toronto Stock Exchange.