DBRS Confirms Sun Media Corporation at BB

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of Sun Media Corporation (“Sun Media” or the “Company”) as indicated above.

Sun Media Corporation (“Sun Media” or the “Company”) continues to generate reasonable operating and financial results amid the sizable financial demands of its parent, Quebecor Media Inc. (“QMI”), and structural adversity of the newspaper industry. Furthermore, business conditions in the aggregate have strengthened at the QMI group of companies. This is noteworthy as a material change in one of the major entities within the group has a meaningful impact on the other entities due to their interrelated structure.

Sun Media’s good advertising revenue growth was due to increased linage and strong performance of community newspapers. DBRS sees these trends continuing as community newspapers have dominant market positions, the economy remains strong, particularly in Alberta where the Company has a large presence, and classified advertising is strong. Furthermore, financial ratios lead the industry. For example, EBITDA margin continues to realize cost benefits from Sun Media’s “clustering” strategy of its newspapers and modestly unionized labour force.

However, QMI, with over Cdn$1 billion of deconsolidated debt, continues to be a major factor undermining Sun Media’s rating as it relies heavily on the Company to service its debt obligations. QMI extracts virtually all of Sun Media’s free cash flow, which constrains the Company’s financial flexibility. However, the pressure on Sun Media has diminished as the recent debt restructuring at QMI will result in considerably lower interest expenses going forward and Vidéotron Ltée’s operations are strengthening. Furthermore, QMI will be poised to reduce debt, which would bolster Sun Media’s credit profile.

In addition, DBRS recognizes that the media landscape has been changing, with consumers relying increasingly on other information sources, such as the Internet and free commuter newspapers. As such, circulation is eroding across many of the Company’s urban newspapers, hampering its ability to raise prices and contributing to stagnant EBITDA for the past several years.

DBRS is comfortable with Sun Media’s strategy to combat these trends, which includes: leveraging existing franchises that have strong reach, exploring more free or youth-targeted publications, bolstering web-based properties, and expanding colour capacity, which is favoured by advertisers. These enhancements will require time to revive newspapers.