DBRS Confirms Cogeco at BBB (low) with a Stable Trend

DBRS has today confirmed the Senior Secured Notes & Debentures rating of Cogeco Cable Inc. (Cogeco or the Company) at BBB (low). The trend is Stable.

The rating confirmation reflects stable operational performance, primarily resulting from the scaling and favourable demand characteristics for advanced video and data services in Canada, offset somewhat by its operations in Portugal (Cabovisão-Televisão por Cabo, S.A.), a market that maintains good growth potential for the longer term, but which has been challenged by tougher competition and an unstable pricing environment. In addition, DBRS notes that the financial risk profile for Cogeco remains healthy as organic growth and acquisitions in F2008 have benefited EBITDA and cash flow from operations.

This balanced business risk profile should continue provided the Company’s Canadian operations can continue to demonstrate good EBITDA growth, and any pressure on EBITDA in Portugal – as a result of the Company’s competition repositioning in F2010 – can be offset by the growth in Canada. Specifically, DBRS expects growth in Canada to continue to be driven by demand for advanced services, such as digital and high-definition video, along with good telephony and high-speed Internet growth. These factors are expected to further drive average revenue per user (ARPU) growth (currently over $91 per month), reduce churn levels and continue to unlock the operating leverage of Cogeco’s Canadian operations, with EBITDA margins now just below 44%, a level that can be considered healthy for a cable operator. Furthermore, DBRS notes that Cogeco continues to invest in its network, with capex levels expected to increase in Canada as it deploys DOCSIS 3.0 and other network enhancements.

However, DBRS notes that the competitive situation in Portugal has intensified in F2009, with competitors and Cogeco battling for each other’s subscribers as each can offer at least three services. While DBRS notes that Cogeco has responded with marketing and customer-retention efforts, the magnitude and effectiveness of such measures will not likely be seen until early in F2010. While DBRS expects to follow this progress in Portugal closely, Cogeco’s business risk profile continues to be driven by its Canadian operations, which generate roughly 80% of revenue and 84% of EBITDA.

For the remainder of F2009, DBRS expects EBITDA growth on a consolidated basis to moderate, with F2010 expected to see EBITDA stabilize at around the $500 level as a result of the factors mentioned above. In addition, DBRS expects modest levels of free cash flow in F2010 as higher capex levels peak for the year due to network investments. DBRS does not anticipate any significant changes to Cogeco’s credit metrics, with EBITDA, cash flow from operations and debt levels expected to remain relatively stable. Despite this, DBRS notes that while Cabovisão is non-recourse to the Canadian operations, should the competitive situation not improve, there could be modest levels of negative free cash flow for Portugal in F2010.

DBRS notes that after a $300 million debt issue in Q4 F2009, the Company has no major maturities until 2011 and healthy liquidity at over $500 million.

Overall, DBRS believes that Cogeco, with its balanced business risk profile and good credit metrics, is well placed at the BBB (low) level, with no major deviations in these factors expected going forward. However, DBRS notes that any rating improvement is likely limited in the near term until the Portuguese operations find a new equilibrium, the Company clearly sets its financial parameters for the future, and can show a track record of funding acquisitions in a balanced fashion.

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

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

This is a Corporate (Cable & Satellite) rating.