DBRS Dwgr Quebecor World & Rel Entities BB(high),Pfd-4(high)

Dominion Bond Rating Service (“DBRS”) has today downgraded the ratings of Quebecor World Inc. (“Quebecor World” or the “Company”) and related entities as indicated above and maintained the trends at Negative. The downgrades are due to: (1) greater than anticipated structural issues that are pressuring EBITDA, (2) accelerated capex to develop a more competitive printing platform, and (3) persistent and expanding international challenges for operations.

In DBRS’s view, several major trends are adversely impacting EBITDA and will not reverse in the near future. Industry overcapacity has resulted in aggressive pricing to attract customers, which continues to hamper margins. Growth of the Internet and digital technology has resulted in a secular shift away from print products. Print products are increasingly used less as information sources and thus advertisers are reducing their allocation to print media. As a result, while price erosion is a well-known concern, volume erosion in several categories has unexpectedly become more of an issue. Volume was expected to mitigate price erosion. Lastly, people are reading less in general with fast-paced lifestyles and alternative entertainment choices.

The Company is expected to accelerate its capex program in 2006 as per company guidance (significantly higher than 2004 levels), which DBRS expects will result in negligible free cash flow in 2006, thus reducing financial flexibility. In previous years, DBRS believes the Company somewhat underinvested in high technology presses, which may have compromised its competitive position. In addition, the Company used some of its free cash flow for share repurchases. It will take some time for new printing capability to deliver additional volume and efficiencies as they will be installed in stages. In addition, DBRS believes that the Company’s competitive position could improve if it added more digital communication products versus print, as digital generally has better margins and growth potential.

On the international stage, there are difficulties in Europe driven by labour disruptions and a less accommodative business climate in France, and lost contracts that are impacting volume gains and pricing. In addition, DBRS believes that printers in China will become a more material threat due to their low cost base and an improving business environment, particularly for less time-sensitive products such as books.
Despite this, DBRS notes that the Company has the capacity to improve its credit profile, since it has the scale that is imperative for this industry and it is a leader in several product categories. Quebecor World would also need to de-leverage the balance sheet to augment its credit profile. This action would counter operational obstacles to some extent.