DBRS Assigns Quebecor Media Issuer Rating of BB (low), Assigns Recovery Ratings and Adjusts Existing Instrument Ratings

DBRS has today assigned an Issuer Rating of BB (low) to Quebecor Media Inc. (QMI or the Company). The Issuer Rating remains the same as the implicit Issuer Rating that would have applied previously. DBRS has upgraded the ratings of QMI’s Secured Debt to BB (high) from BB (low) and raised the Senior Notes rating to BB (low) from B (high). The trends are all Stable.

The higher debt ratings are pursuant to DBRS’s leveraged finance rating methodology, which is applied to all companies with non-investment-grade issuer ratings. Using this methodology, DBRS has assigned an RR1 recovery rating to QMI’s Secured Debt, which reflects an expected 90%-100% recovery under a distress scenario. As a result, the Secured Debt is rated two notches higher than QMI’s BB (low) Issuer Rating. An upgrade of only two notches is given to this secured debt (even though with the RR1 rating, a three-notch upgrade is possible), as QMI is a holding company that is one level away from the operating assets of the companies whose shares collateralize this debt.

In addition, given its average expected recovery (30%-50%), DBRS has assigned a RR4 recovery rating to QMI’s Senior Notes and a BB (low) instrument rating, which is the same as its Issuer Rating. The actions here apply to QMI’s debt at the corporate level, and match similar actions taken at its subsidiaries, Vidéotron Ltée (Vidéotron) and Sun Media Corporation (Sun Media).

QMI’s corporate Issuer Rating is based on its own leverage and the cash flow from its major operating subsidiaries – Vidéotron (Issuer Rating at BB (high)), Sun Media (Issuer Rating at BB), Osprey Media (not rated) and TVA Group Inc. (not rated). Vidéotron’s strong operating performance has driven earnings growth for the past two years, which has reduced its financial risk.

Vidéotron continues to benefit from its strong position in the Québec market (passing 2.5 million homes) and its triple-play growth in digital TV, high-speed Internet, and telephony subscribers. This has increased ARPU and reduced churn. DBRS expects these growth drivers to remain in place for Vidéotron in 2009 and 2010. This growth is expected to more than offset the expected startup operating costs associated with its new wireless network. 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 wireless despite significant competition for this service.

On the other hand, Sun Media’s operating performance has come under pressure, with the downturn in the Canadian economy, the cyclical nature of its business and the pressure from the structural change in advertising. Advertisers are spending less and shifting 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. Sun Media’s significant de-leveraging effort in 2007 has reduced its financial risk and now appears reasonable in this current downturn. Should these cyclical and secular pressures persist and intensify, leading to negative cash flow and higher leverage, there would be downward pressure on Sun Media’s ratings.

DBRS expects that Vidéotron, Sun Media, Osprey Media and the Company’s other subsidiaries will have the capacity to contribute over $400 million in cash distributions to QMI in 2009, which should more than cover expected interest and corporate expenses, as well as QMI’s external dividend payment, during the year. In addition, QMI continues to maintain good liquidity, with roughly $100 million available under its undrawn revolving credit facility. As a result, DBRS expects QMI to be able to maintain its ratings at the current level through 2009 and 2010. However if the subsidiaries’ cash flows decline or capex becomes aggressive, leading to increased leverage, the group’s ratings could come under pressure.

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.