Dollar store operator Dollarama (TSE:DOL) (OTC:DLMAF) announced that it is raising C$700 million worth in debt through the form of senior unsecured notes. C$250 million worth of notes will mature on October 27, 2025, with an interest rate of 5.084%, while another C$450 million will mature on April 26, 2030, bearing a 5.165% interest rate. Dollarama expects that the combined effective interest rate of these notes will be 4.83%. Both notes will be issued at par and paid semi-annually.
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Dollarama also has 2.2% senior notes worth $C250 million maturing in just over a month, and it will use its new debt to pay that off. The rest of the debt financing will be used for general purposes and to repay some of its U.S. commercial paper notes.
Notably, Dollarama’s cost of debt has risen from 2.2% to over 5%, a symptom of a rising-rates economy. However, Dollarama is a solid company that can handle rising interest expenses due to its solid financials.
Last quarter, it had an interest coverage ratio of 10.5x, meaning that, in the previous quarter, DOL could pay its interest expenses 10.5x times over using its operating income. DBRS Limited has assigned the notes a BBB rating.
Is Dollarama Stock a Buy, According to Analysts?
Analysts give DOL stock a Strong Buy consensus rating based on seven Buys and two Holds. The average Dollarama stock price target of C$88.83 implies 7.1% upside potential. The relatively low upside potential reaffirms our thesis from a few days ago that the stock may not be the greatest bargain at current levels but that it isn’t necessarily overpriced either.
Conclusion: Debt Financing Will Help Fund Dollarama’s Growth Plans
While Dollarama’s cost of debt is rising, this likely won’t hurt the company because its fundamentals are strong, as we explained in our recent article linked above. Also, its interest coverage ratio is high, giving DOL a high margin of safety regarding interest payments. The new debt will give Dollarama more liquidity to fund its expansion plans.
