DBRS Confirms Torstar Corporation at BBB, Trend Now Negative

DBRS has today confirmed its rating of Torstar Corporation’s (Torstar or the Company) Medium-Term Notes at BBB, but has changed the trend to Negative from Stable. The Negative trend reflects DBRS’s belief that structural changes in Torstar’s newspaper operations may be exacerbated by the economic downturn and, as a result, EBITDA may not return to previous levels (i.e., those seen in 2007) when the economy ultimately improves. In addition, DBRS believes that the Company’s ability to strengthen its balance sheet has been helped by its lower dividend payout, but this may be mitigated by reduced levels of EBITDA going forward.

DBRS notes that the economic downturn has had a significant impact on revenue and EBITDA in Torstar’s Newspaper and Digital division (includes Star Media Group and Metroland Media Group), especially on advertising in the areas of employment, real estate and automotive. DBRS believes that these sizeable contributors to classified advertising may not return to prior levels.

It is unclear to DBRS at this stage whether national, retail and general advertising will be able to take the place of lower levels of classified advertising and whether Torstar can command similar advertising rates in an attempt to compensate. In addition, DBRS notes that newspaper subscriptions for Torstar’s paid dailies continue to decline each year as subscribers move to free dailies, the Internet and other sources for news and information. Despite this, DBRS notes that total weekly readership (which includes online) appears healthy, with an audience of nearly 2.2 million at the Toronto Star and nearly 1.0 million at the Greater Toronto Area edition of Metro.

Torstar does benefit partially from the trend away from paid dailies with its digital operations and joint venture operating the Metro franchise in six Canadian cities. DBRS notes that Torstar has a considerable market share in Canada’s largest market with its flagship daily, the Toronto Star, and its Metro and Sing Tao joint ventures. Despite the aforementioned declines driven mainly by lower classified advertising, revenue at its Metro papers grew in the latest period.

As for Torstar’s over 105 community-based newspapers (which form the large majority of its Metroland Media Group segment), DBRS believes that there are fewer structural challenges (retail advertising and flyers) facing these free weeklies, although their revenue is somewhat dependent on classified advertising. Some fine-tuning in terms of operating efficiencies may be required for this segment going forward, but DBRS believes that this medium remains an effective means for local and retail advertisers to reach their audiences.

Given the structural changes underway, DBRS believes that Torstar may be challenged to right-size its cost structure in Newspaper and Digital in the future. As a result, DBRS considers that despite growth in its digital operations, Torstar’s operating leverage could continue to weaken in the segment over time. Unless additional efficiencies can be obtained, this is expected to pressure EBITDA margins in the Newspaper and Digital division.

DBRS notes that Torstar’s Harlequin division continues to perform well, despite the weaker economy, as its position in the market continues to evolve. DBRS notes that this division’s global and digital expansion (volume growth in new countries, digital in Japan and electronically in preparation for e-Readers) has more than offset pressure in its North American direct sales channels (where there are likely some structural changes occurring) and retail channels. As a result, this division continues to benefit from improved operating leverage and reasonable growth prospects as it branches into new categories such as self-help and non-fiction.

From a financial perspective, Torstar’s credit metrics have weakened largely due to cyclical factors, with debt-to-EBITDA increasing to around 3.5 times and the percentage of debt in the capital structure rising to above 50% (largely due to earnings pressure and writedowns). DBRS believes that given the structural changes that it faces, Torstar may find it difficult to restore its credit metrics to 2007 levels or better.

DBRS notes that while Torstar’s decision to reduce its dividend earlier in 2009 was prudent – as it will likely keep the Company generating positive free cash flow – the pressure on EBITDA and, going forward, higher interest and pension costs may mitigate this benefit. Additionally, DBRS notes that Torstar’s CTVglobemedia Inc. investment, which more than doubled debt levels in 2006, has not generated any dividends or cash income, while Torstar continues to service this debt.

DBRS will continue to follow Torstar’s: (a) ability to adapt to these structural changes in its Newspaper and Digital division, and (b) progress in reducing its leverage as the economy improves. Torstar’s progress on these fronts will likely become apparent during H1 2010. DBRS believes that any potential downgrade would be limited to one notch as Torstar, with its community-based newspapers and Harlequin operations (in addition to its digital businesses), does offer better diversity than some of its North American peers.

Notes:
The applicable methodology is Rating Printing and Publishing, which can be found on our website under Methodologies.

This is a Corporate (Telecom/Media/Technology) rating.