DBRS Assigns Vidéotron Issuer Rating of BB (high), Assigns Recovery Ratings and Bank Debt Ratings, Adjusts Existing Instrument Rating

DBRS has today assigned Vidéotron Ltée (Vidéotron or the Company) an Issuer Rating of BB (high) and a Secured Bank Debt rating of BBB (low). Vidéotron’s Senior Unsecured Notes rating has been upgraded to BB (high) from BB, and DBRS has also assigned recovery ratings to Vidéotron’s Secured Bank Debt and Senior Unsecured Notes of RR1 and RR3, respectively, pursuant to its leveraged finance rating methodology. The trends on all ratings are Stable.

The BB (high) Issuer Rating is one notch higher than Vidéotron’s former implied Issuer Rating of BB (identical to its former Senior Unsecured Notes rating), previously with a Positive trend. The implied upgrade is a result of the strong operating performance of Vidéotron in recent years, which has driven EBITDA growth in the mid-20% range for the past few years. This has translated into a stronger financial risk profile, with gross debt-to-EBITDA remaining below 2.5 times for the past three years and expected to remain at or below this level going forward. Despite this, DBRS notes that Vidéotron’s Issuer Rating is constrained by the leverage at its parent, Quebecor Media Inc. (QMI, see related press release), which continues to depend on Vidéotron’s cash distributions to support its interest costs and funding requirements.

Vidéotron’s BB (high) Issuer Rating is supported by its strong market position in the Québec market, with a cable footprint that covers 2.56 million homes and services 1.73 million basic subscribers. Vidéotron continues to benefit from not only basic subscriber growth, but also steady growth in digital, high-speed Internet, and telephony subscribers. Plus, Vidéotron continues to be successful in bundling its subscribers, with a rising number of subscribers taking two or three of its services. This is a marketplace that remains highly competitive for the satellite and telco operators that provide all of these services.

This bundling effort has not only taken Vidéotron’s ARPU levels to over $86/month ($51.86/month in 2005), it has also driven basic subscriber growth (a mature product) and lowered subscriber churn levels. These factors have contributed to the aforementioned double-digit EBITDA growth over the past two years while boosting EBITDA margins to impressive levels – mid-40% range for the past two periods. DBRS notes that EBITDA margins were weak for Vidéotron relative to its peers in 2002, at around 30%.

DBRS expects these growth drivers to remain in place for Vidéotron in 2009 and 2010, with EBITDA growth expected to more than offset the forecast start-up operating costs as the Company begins to deploy its wireless network. As such, DBRS expects EBITDA to improve to above the $900 million level in 2009, with further growth in 2010. Furthermore, the deployment of DOCSIS 3.0 in 2009 should strengthen the Company’s competitive position versus other video providers/telcos in terms of high-speed Internet services.

DBRS notes that Vidéotron purchased wireless spectrum in 2008 for $555 million, giving it 40MHz of spectrum in Québec along with lesser amounts in parts of Ontario. The Company is building a wireless network in Québec and plans to roll out and integrate this fourth service into its service bundle. While wireless is a highly competitive market in Canada, DBRS believes that with its existing subscribers, bundling capabilities and distribution channels, Vidéotron should be successful in extending into the wireless business.

While DBRS expects Vidéotron’s debt levels to increase in 2009 to cover a free cash flow deficit (as capex levels escalate to deploy wireless), DBRS believes that the roughly $150 million in additional debt expected remains reasonable, with EBITDA and cash flow from operations continuing to grow. As a result, DBRS does not anticipate that the Company’s gross debt-to-EBITDA will weaken in 2009 or 2010. Once the bulk of wireless capex is completed (2009 and 2010 are expected to be the peak years), spending should be reduced to levels in line with other wireless carriers (15% to 20% of revenue).

DBRS notes that should Vidéotron’s wireless deployment and entry into this business be successful – in tandem with continued healthy results and reasonable leverage – positive rating action may be warranted over time. However, DBRS does caution that, while currently not anticipated, significant additional debt levels at Vidéotron’s parent, QMI, and/or material deterioration in Vidéotron’s strong cable operations, could lead to pressure on the Company’s ratings.

DBRS has stressed Vidéotron under a default scenario whereby it could possibly default on its debt obligations over a 2009 to 2012 time frame under certain assumptions outlined below. In this default scenario, Vidéotron would be in a negative free cash flow position and would require additional debt to fund itself (DBRS has assumed the Company increases its secured credit facility and borrows $1 billion).

At a stressed valuation level, DBRS notes that Vidéotron’s secured bank debt ($1.1 billion) has outstanding recovery prospects under a base case default/recovery scenario. As such, DBRS has assigned Vidéotron’s Secured Bank Debt a recovery rating of RR1 (90%-100% expected recovery) and an instrument rating of BBB (low), one notch above Vidéotron’s BB (high) Issuer Rating. This is consistent with DBRS’s updated leveraged finance rating methodology released on June 9, 2009.

DBRS notes that Vidéotron’s senior unsecured debt ($1.9 billion) has good recovery prospects under a base case default/recovery scenario. As such, DBRS has assigned Vidéotron’s Senior Unsecured Notes a recovery rating of RR3 (50%-70% expected recovery) and an instrument rating of BB (high) (the same as Vidéotron’s BB (high) Issuer Rating), as this senior unsecured debt ranks behind the Company’s secured bank debt.

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

The applicable methodologies are Rating Cable and DBRS Rating Methodology for Leveraged Finance, which can be found on our website under Methodologies.

This is a Corporate (Cable & Satellite) rating.