DBRS Downgrades Canwest Media and Canwest LP and Places Ratings Under Review – Negative

DBRS has today downgraded the Issuer Rating of Canwest Media Inc. (Canwest Media or the Company) to CCC from B (high) and its debt instrument ratings. At the same time, DBRS has downgraded Canwest Media’s wholly owned subsidiary, Canwest Limited Partnership (Canwest LP). Canwest LP’s Issuer Rating has been downgraded to CCC (high) from BB (low). The ratings have also been placed Under Review with Negative Implications pending the outcome of Canwest Media’s negotiations with its banks regarding its secured credit facility.

DBRS had originally placed Canwest Media and Canwest LP’s ratings Under Review with Negative Implications on January 15, 2009. This followed the Company’s Q1 F2009 results and outlook for F2009, stating that it may not be able to meet its financial leverage ratio covenants in F2009. As a result, DBRS was concerned that the Company’s liquidity and financial risk profile could continue to be increasingly pressured. (Please see the DBRS press release dated January 15, 2009, for more details.)

DBRS has downgraded its rating on Canwest Media’s Secured Bank Debt to B from BB (high) and confirmed its recovery rating of RR1, indicating anticipated recovery prospects of 90% to 100%. DBRS has also downgraded the Company’s Senior Subordinated Notes four notches to CCC (low) from B and confirmed its recovery rating of RR5, indicating anticipated recovery prospects of 10% to 30%. (See further details on Canwest LP rating actions below.)

The downgrade of Canwest Media’s Issuer Rating reflects two main factors. Firstly, DBRS believes that Canwest Media’s financial flexibility is extremely limited as it is not currently in compliance with its bank covenants regarding its $300 million credit facility and negotiations with its banks remain ongoing, with recent waivers set to expire on February 27, 2009. Should the terms of this facility not be successfully renegotiated or some other solution be implemented in the near term to repay the nearly $100 million drawn under this facility, Canwest Media would be in a default position under this credit facility.

Secondly, the pressure on the Company’s underlying business remains significant given the dramatic economic pressure affecting the Canadian advertising market along with the ongoing structural changes in its conventional TV operations. Additionally, similar pressure is being felt at Canwest Media’s subsidiaries, Canwest LP and TEN Network Holdings, which support Canwest Media’s $1.1 billion of debt at this level with their distributions. DBRS expects distributions from both of these entities to decline in F2009 as a result of the pressure on their operations.

While DBRS notes that Canwest Media has implemented some cost-cutting initiatives at its TV operations and at Canwest LP’s newspaper operations and recently announced its plans to sell its second-tier conventional TV channels, these factors are not likely great enough to offset the Company’s operating pressure and put Canwest Media onside with its debt covenants.

DBRS notes that Canwest Media reset its debt covenants as part of its amended credit facility in November 2008. DBRS notes that any covenant headroom gained from these amendments has been completely eroded given that both economic conditions and the advertising market have weakened much faster than the Company had anticipated.

DBRS has also downgraded the Issuer Rating of Canwest LP to CCC (high) from BB (low) and its Secured Bank Debt to B (low) from BB (high); the recovery rating of the Secured Bank Debt has been downgraded to RR3 from RR2, indicating anticipated recovery prospects of 50% to 70%. The lower recovery rating on is due to greater pressure expected on this business and a lower recovery multiple given lower multiples in the newspaper industry. DBRS has also downgraded Canwest LP’s Senior Subordinated Notes to CCC (low) from B and confirmed its recovery rating at RR6 indicating anticipated recovery prospects of 0% to 10%.

The downgrade of Canwest LP reflects the following: (1) the weakness in its newspaper operations that is pressuring its distributable cash flow; (2) high levels of debt at $1.5 billion, with modest financial flexibility; and (3) DBRS’s view that a default at Canwest Media could ultimately indirectly affect Canwest LP.

While the newspaper operations of Canwest LP tend to be highly cyclical, DBRS notes that the pace of the current pressure is significant (EBITDA down 29.1% in Q1 F2009). This was driven by a dramatic downturn in the Canadian economy and a significant slowdown in key advertising categories across the country such as automotive, retail and real estate. While Canwest LP has attempted to cut costs and continues to benefit from healthy online advertising growth, the benefit of these factors is not likely to keep pace with this pressure throughout F2009. As a result, both EBITDA and EBITDA margins are expected to be lower for Canwest LP in F2009. Additionally, DBRS is concerned that this operating pressure, coupled with high levels of debt, is likely to push Canwest LP closer to its financial covenants during F2009. Furthermore, the seasonal nature of the newspaper business could require additional borrowing throughout F2009.

Finally, DBRS notes that while creditors at Canwest Media do not have recourse to the assets of the operating subsidiaries such as Canwest LP, a portion of its debt is secured by the shares of its operating companies. As such, should a restructuring occur at Canwest Media, this could indirectly affect Canwest LP as it could be part of an overall restructuring plan. DBRS notes that from a consolidated perspective Canwest Media has $4.1 billion of debt outstanding and gross debt-to-EBITDA for the 12 months ending November 30, 2008, of 7.08 times.

As part of its review, DBRS expects to continue to monitor closely Canwest Media’s negotiations with its banks and other means it takes to improve its liquidity and financial risk profile. At this stage, DBRS cannot rule out additional rating actions that could further lower the ratings of Canwest Media and Canwest LP.

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

The applicable methodology is Rating Media and Entertainment, which can be found on our website under Methodologies.

This is a Corporate rating.