DBRS Assigns Sun Media Issuer Rating of BB, Assigns Recovery Ratings and Bank Debt Ratings, Adjusts Existing Instrument Rating

DBRS has today assigned Sun Media Corporation (Sun Media or the Company) an Issuer Rating of BB. DBRS has also assigned recovery and instrument ratings of RR1 and BBB (low) to Sun Media’s Secured Bank Debt, and a recovery rating of RR5 to its Senior Unsecured Notes. The instrument rating of the Company’s Senior Unsecured Notes has been downgraded from BB to BB (low), pursuant to DBRS’s leveraged finance rating methodology. The trend on all ratings is Stable.

The BB Issuer Rating is the same as Sun Media’s previously implied Issuer Rating of BB (identical to the former Senior Unsecured Notes rating). While DBRS notes that Sun Media’s business risk profile is under some pressure, there are a number of reasons why DBRS is comfortable assigning the Company a BB Issuer Rating with a Stable trend.

First, DBRS believes that most of the pressure on Sun Media remains cyclical, that is, driven by the downturn in the Canadian economy. However, beyond this cyclical pressure, Sun Media does continue to experience ongoing secular trends as advertisers and readers shift to online formats. Sun Media is attempting to combat this by increasingly moving its content online, ramping up its free daily strategy in most major markets, and streamlining its cost structure.

Second, with the Company’s significant de-leveraging effort in 2007, DBRS believes that Sun Media is now better positioned in terms of leverage. Gross debt-to-EBITDA currently stands at around 2.0 times, and is not expected to exceed 2.5 times in 2009 or 2010. These two years are likely to be the weakest points for EBITDA, given the current economic downturn. DBRS believes that this level of leverage remains reasonable for a newspaper publishing company.

And third, Sun Media’s Issuer Rating is constrained by the leverage at its parent, Quebecor Media Inc. (QMI), which relies on Sun Media’s distributions to support its interest costs and funding requirements.

While DBRS expects that Sun Media will continue to be affected by these cyclical factors until the economy begins to improve, DBRS does not expect: (a) revenue pressures to further increase; (b) EBITDA to decline significantly below $150 million; (c) a free cash flow deficit position (after distributions and including cash tax savings) over the next couple of years. Part of this expectation on free cash flow is driven by the variable nature of Sun Media’s distributions to QMI. DBRS notes that these distributions are generally reduced as cash flow from operations declines and raised as it improves.

Despite these expectations, should any of the cyclical and secular pressures on Sun Media intensify and persist beyond DBRS’s expectations and/or leverage is fundamentally increased at either Sun Media or QMI, these factors could lead to pressure on Sun Media’s BB Issuer Rating.

DBRS has stressed Sun Media under a default scenario whereby it could possibly default on its debt obligations over a 2009 to 2011 time frame. In this default scenario, Sun Media would be in a negative free cash flow position and would require additional debt to fund itself (DBRS has assumed the Company borrows an additional $180 million under a secured credit facility, which is within current headroom under the secured debt test).

At a distressed valuation level, DBRS notes that Sun Media’s Secured Bank Debt (assuming $250 million is outstanding) has great recovery prospects under a base case default/recovery scenario. As such, DBRS has assigned Sun Media’s Secured Bank Debt a recovery rating of RR1 (90%-100% expected recovery) and an instrument rating of BBB (low), two notches above its BB Issuer Rating. This is consistent with DBRS’s updated leverage finance rating methodology released on June 9, 2009.

DBRS notes that Sun Media’s Senior Unsecured Notes ($245.7 million outstanding) have below-average recovery prospects under a base case default/recovery scenario. As such, DBRS has assigned Sun Media’s Senior Unsecured Notes a recovery rating of RR5 (10%-30% expected recovery) and downgraded its instrument rating to BB (low) from BB, one notch below the BB Issuer Rating.

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

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

This is a Corporate (Publishing & Media) rating.