DBRS Confirms Sun Media at BB, Stable Trend

DBRS has today confirmed the rating of Sun Media Corporation (Sun Media or the Company) at BB. The trend is Stable. DBRS has also confirmed the ratings of Vidéotron Ltée (Vidéotron) at BB, and changed the trend to Positive from Stable, and the parent of both companies, Quebecor Media Inc. (QMI), at BB (low)/B (high). The trends on QMI are Stable. (See separate press releases on Vidéotron and QMI.)

DBRS notes that Sun Media has experienced EBITDA pressure in 2006 as a result of advertising and circulation revenue weakness at some of its daily urban newspapers and resulting from its launch of free dailies into more markets. However, DBRS expects that these pressures will subside in 2007 and along with the completion of new printing presses in Toronto and Montréal (expected completion mid-2007) will result in stabilized EBITDA in 2007, albeit below historical levels. DBRS believes that the Company has alleviated the impacts of competitive-driven circulation erosion at The Toronto Sun and Le Journal de Montréal (collectively roughly one-third of Sun Media’s total revenue). Furthermore, with the expected completion of the upgrade of its printing plants in these locations (serving four of its urban markets) Sun Media will be able to operate its production lines more efficiently in addition to giving it the ability to increase its advertising rates as a result of expanded printing capabilities.

Overall, DBRS notes that Sun Media continues to benefit from increased advertising rates in the majority of its urban markets which more than offset the ongoing impact of subscriber erosion. Additionally, the Company’s papers in its western markets continue to experience strong advertising growth due to robust economies in western Canada, particularly in Alberta. As a result of all of these factors, DBRS expects EBITDA in 2008 to approach more normal levels of around $220 million.

Sun Media’s financial risk profile remains reasonable with debt levels expected to end 2006 roughly flat in the $630 million to $640 million range with good free cash flow generation (before dividends) of more than $100 million. While DBRS notes that Sun Media continues to pay a sizable dividend to its parent, QMI, the recent refinancing at QMI has moderately reduced QMI’s funding needs, which should indirectly reduce the pressure on Sun Media, Vidéotron and other QMI operating companies. Additionally, assuming that dividends are held stable at current levels of roughly $150 million, Sun Media is expected to continue to generate a free cash flow deficit of between $50 million and $60 million in both 2006 and 2007. DBRS expects the Company to continue to fund these deficits with cash tax savings that it continues to derive from tax loss sharing arrangements with QMI. While the Company’s key credit ratios are expected to experience further modest pressure in 2006 (in conjunction to the aforementioned EBITDA pressure), DBRS expects that these ratios will stabilize in 2007 and continue to remain reasonable for its rating.

Overall, DBRS believes that Sun Media can maintain its rating while it stabilizes its operations in Toronto and Montréal and maintains a stable financial risk profile. However, should this pressure on its operations remain ongoing and/or dividends increase significantly causing further pressure on Sun Media’s overall risk profile, DBRS would consider negative rating action.

Note:
All figures are in Canadian dollars unless otherwise noted.