DBRS Takes Various Rating Actions on Canwest Media Inc., Rates Canwest Limited Partnership

DBRS has today taken various rating actions on the Issuer Rating and debt instrument ratings of Canwest Media Inc. (Canwest Media or the Company). DBRS has also assigned a rating to the Company’s secured bank debt, and assigned recovery ratings to each of the Company’s two classes of debt instruments. At the same time, DBRS has assigned new ratings to Canwest Limited Partnership (Canwest LP), a wholly owned subsidiary of Canwest Media Inc. (See further detail on Canwest LP ratings below).

Specifically, DBRS downgraded Canwest Media’s Issuer Rating two notches, to B (high) from BB. DBRS has assigned a rating of BB (high) to Canwest Media’s Secured Bank Debt and assigned a recovery rating of RR1 (90%-100%), indicating Outstanding recovery prospects. DBRS has also downgraded the Company’s Senior Subordinated Notes one notch to B from B (high) and assigned a recovery rating of RR5 (10%-30%), indicating Below Average recovery prospects. The trend on the Issuer Rating and instrument ratings is now Negative. (It was Stable prior to being placed Under Review – Negative). These rating actions resolve the Under Review with Negative Implications where the ratings were placed on October 31, 2008. (Please see separate press release, dated October 31, 2008).

The downgrade of the Issuer Rating reflects ongoing pressure on the Company’s underlying business, including the structural challenges impacting conventional television, coupled with cyclical pressures impacting the Canadian advertising market. This, when combined with Canwest Media’s high debt levels, has resulted in reduced financial flexibility and liquidity constraints.

Additionally, as a holding company, Canwest Media is dependent on the remitted cash flows of its subsidiary operations. As a result, the downgrade also reflects the DBRS view that ongoing deterioration of the advertising market will also pressure cash flow at the Company’s primary subsidiaries (Canwest LP and TEN Network Holdings). This is expected to result in a decrease in cash flow remissions to the Company, which could put Canwest Media into a negative free cash flow position by the end of fiscal 2009.

Canwest Media’s credit metrics on a remitted basis have deteriorated in fiscal 2008 as a result of (1) a nearly 30% decline in EBITDA at the Company’s core Canadian television operations and (2) lower distributions from Canwest LP following its privatization and refinancing in fiscal 2007.

Despite this, the Company generated sufficient cash from both internal operations and from remitted cash flows to remain internally funded during fiscal 2008. However, looking forward to fiscal 2009, DBRS expects a weak advertising market to have an adverse impact on both internally generated cash flow (though Canadian television) and remitted cash flows from its wholly owned subsidiary operations (Canwest LP and TEN Network), both of which are also heavily dependent on advertising revenue. This is expected to put further adverse pressure on the Company’s already weak financial risk profile.

DBRS rating actions also consider Canwest Media’s recently announced cost savings initiatives (estimated to yield savings of $47 million in fiscal 2009, or just over $60 million annually on a consolidated basis). While these cost saving measures are necessary to address the cyclical and structural challenges facing conventional television and the cyclicality of the Company’s newspaper operations, given the degree of operating leverage that exists in the Company’s cost structure, DBRS expects revenue pressures will be a more significant driver of EBITDA and remitted cash flow declines through fiscal 2009.

When considering the Company’s recently amended debt covenants, DBRS notes these changes take effect at various dates through fiscal 2009. Specifically, the Canwest Media’s total leverage covenant provides additional headroom each quarter until fiscal year end 2009 (when it reaches 6.75 times from 5.00 times at the end of fiscal 2008), while the Company’s interest covenant steps down each quarter to 1.50 times at May 31, 2009 (from 2.00 times at the end of fiscal 2008). However, should economic conditions and the advertising market remain challenging and weaken more than anticipated, the Company’s covenant cushion could erode faster than its headroom increases throughout fiscal 2009.

DBRS has also assigned an Issuer Rating of BB (low) to Canwest Limited Partnership (Canwest LP), a wholly owned subsidiary of Canwest Media, and assigned various instrument and recovery ratings to Canwest LP’s Secured Bank Debt of BB (high)/RR2 and its Senior Subordinated Notes of B/RR6.

Canwest LP’s Issuer Rating reflects (1) Canwest LP’s strong portfolio of traditional newspapers and digital content; (2) its high dependence on advertising in a business that is experiencing persistent circulation erosion; (3) above-average EBITDA margins of roughly 25%, which allows for high pre-distribution cash flow conversion rates given Canwest LP’s limited near-term capital requirements; (4) high leverage, as evidenced by total debt-to-EBITDA in excess of 4.6 times and interest coverage of less than 3.0 times; and (5) support of debt residing at the Company’s highly leveraged parent, Canwest Media.

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