DBRS Confirms Sun Media Corp. at BB, Stable Trend

DBRS has today confirmed the rating of the Senior Unsecured Notes of Sun Media Corporation at BB. The trend is Stable. Concurrently, DBRS has also confirmed the long-term debt ratings of Vidéotron Ltée (Vidéotron) at BB with a Positive trend and confirmed the ratings of the parent of both companies, Quebecor Media Inc. (QMI) at BB (low), B (high) with a Stable trend. (Please see separate press releases for Vidéotron and QMI).

Sun Media’s rating remains underpinned by the Company’s strong franchise of community and urban daily and non-daily publications located in markets throughout Canada. Additionally, Sun Media continues to generate stable levels of EBITDA and cash flow from operations. However, the rating also reflects pressure on the Company’s financial profile not directly apparent in its financial ratios as a result of its requirement to support an estimated $1.85 billion of indebtedness at QMI.

Operationally, DBRS expects the Company to continue to face challenges in major urban markets, as competition and structurally driven circulation erosion continues to pressure flagship publications such as the Toronto Sun, Le Journal de Québec and Le Journal de Montréal. Collectively, these publications make up more than a third of Sun Media’s consolidated revenue. To date, Sun Media has been successful at insulating its earnings profile from these trends as advertising revenue at its non-daily and free daily publications have experienced good revenue growth.

Additionally, while the Company’s EBITDA margins have remained suppressed below historic levels, this trend should abate in 2008 following the recent launch of additional free daily publications in new markets and as cost reduction efforts begin to be realized in the near term. However, expected margin expansion in 2008 will likely translate only into flat to low-level EBITDA growth through the year as the Company’s revenues could come under cyclical pressure as advertising revenue contracts due to expectations of a weakening economy.

DBRS expects Sun Media’s absolute debt levels to be lower at the end of 2007 as the Company has repaid approximately $280 million of debt and associated derivatives utilizing part of the proceeds of QMI’s debt issue in October 2007. As a result, the Company’s credit metrics should improve, with debt-to-EBITDA expected to decline to roughly 2.00x and cash flow-to-debt expected to approach 0.30x by the end of the year (excluding convertible subordinate debt to QMI).

Following this repayment, debt levels at Sun Media are expected to remain roughly flat in 2008, as the majority of the Company’s cash flow from operations is returned to support the cash flow needs of QMI. As a result, DBRS expects Sun Media’s credit metrics to remain stable over the period, with only a slight capacity for improvement in line with moderate EBITDA and cash flow from operations.

The trend remains Stable despite the strengthening of Sun Media’s financial profile, reflecting the indirect financial pressure resulting from Sun Media’s direct support for QMI’s financing requirements. As a result of the capital structure of the group as a whole and, given Sun Media’s flat operating performance, the rating is likely to remain at the current level until Sun Media’s support for QMI can be reduced or until there is a significant improvement in the operations of Sun Media.

DBRS notes a destabilization of EBITDA resulting from pressure on the Company’s key urban daily publications and/or, if excessive cash distributions are extracted from the Company by QMI, the Company’s ratings could come under pressure.

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