DBRS Downgrades Canwest Media Subordinate Debt to D; Confirms Issuer Rating at C and Maintains Under Review with Negative Implications

DBRS has today downgraded Canwest Media Inc.’s (Canwest Media or the Company) Senior Subordinated Notes rating to D from C (low). In addition, DBRS has discontinued its recovery rating on Canwest Media’s Senior Subordinated Notes as per DBRS’s methodology. Previously, the recovery rating on these notes was RR5 (indicating anticipated recovery prospects of between 10% and 30%).

DBRS has confirmed Canwest Media’s Issuer Rating at C and the recovery rating on its Secured Bank Debt at RR1 (indicating anticipated recovery prospects of 90% to 100%), which continues to result in an instrument rating of CC, three notches above Canwest Media’s C Issuer Rating. These ratings remain Under Review with Negative Implications, where they were placed on March 12, 2009.

The downgrade of Canwest Media’s Senior Subordinated Notes rating to D follows the Company’s failure to make a US$30.4 million interest payment on these notes on April 14, 2009. Canwest Media’s interest payment was originally due on March 15, 2009. When this payment date was not met, a 30-day cure period was triggered, giving the Company additional time to make this payment before a default occurred. As the original cure period (as per the indenture that governs these notes) has expired and the interest payment has not been made, DBRS considers this a default under its rating methodology.

DBRS notes that on April 14, 2009, Canwest Media announced that it had received an extension agreement from an ad hoc committee of its noteholders (representing 70% of the notes). As part of this agreement, noteholders will not demand immediate payment of the US$761 million of principal and any unpaid interest on these notes from Canwest Media until April 21, 2009.

This extension to April 21, 2009, now coincides with the expiry of its current waiver from the senior lenders (as obtained on April 7, 2009) on its secured credit facility. Canwest Media was not in compliance with its current financial covenants under its secured credit facility as per its recent quarter-end (February 28, 2009).

With these extensions, Canwest Media plans to continue to discuss a recapitalization agreement with its senior lenders and noteholders over the next week and seeks to gain the necessary extensions to allow a recapitalization plan to proceed. However, DBRS notes that should additional extensions and a recapitalization plan not be successful, the Company may be left with no alternative but to seek creditor protection.

As such, DBRS has maintained Canwest Media’s C Issuer Rating and the CC/RR1 ratings on its Secured Bank Debt Under Review with Negative Implications. DBRS will continue to monitor Canwest Media’s recapitalization initiatives, along with the waivers from its senior lenders which to date have precluded the banks from issuing a notice of default.

In addition, Canwest Limited Partnership’s (Canwest LP) Issuer Rating has been maintained at C (high), along with the CC (low)/RR3 ratings on its Secured Bank Debt and the C (low)/RR6 ratings on its Senior Subordinated Notes. These ratings also remain Under Review with Negative Implications, where they were placed on March 12, 2009, following DBRS’s previous downgrade of Canwest LP’s ratings.

DBRS does note that Canwest LP has initiated discussions with its senior lenders to seek to amend its financial covenants through the remainder of F2009 (ends August 31, 2009). Canwest LP could breach the covenants under its Secured Bank Debt during the current quarter (Q3 F2009, which ends on May 31, 2009).

Should Canwest LP not be successful in attaining an amendment or waiver, it too would need to either execute a recapitalization plan or, failing that, possibly seek creditor protection. DBRS notes that if Canwest LP were to seek creditor protection, this would trigger a cross-default provision under the obligations at Canwest Media.

As part of its review of Canwest LP, DBRS will assess: (a) the outcome of Canwest Media’s possible recapitalization; (b) Canwest LP’s negotiations with its senior lenders on amending the financial covenant tests under its secured credit facility; and (c) the appropriateness of its C (high) Issuer Rating on Canwest LP, given Canwest LP’s current liquidity and the tremendous pressure on its newspaper operations (for which EBITDA declined by 37% for the first six months of F2009).

DBRS notes that a successful recapitalization at Canwest Media could indirectly benefit Canwest LP, as lower distributions would be required to be sent to the parent to service its debt, which currently totals $1.3 billion. This was roughly 30% of Canwest Media’s consolidated debt ($4.3 billion) at February 28, 2009.

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 (Publishing & Media) rating.