DBRS Changes Trend on Torstar Corporation’s BBB Rating to Stable

DBRS has today changed the trend on the BBB rating on the Medium-Term Notes of Torstar Corporation (Torstar or the Company) to Stable from Negative. When DBRS changed Torstar’s rating trend to Negative in October 2009, it was the height of the economic downturn and DBRS was concerned that structural changes in the newspaper division could be exacerbated by the economic downturn. While this still may be the case, the Company has responded well to these challenges. Additionally, Torstar benefits from the stability of its book-publishing segment (Harlequin Enterprises Limited (Harlequin)) and the greater structural stability of its community-newspaper segment (Metroland Media Group Ltd. (Metroland)), which collectively drive more than 80% of the Company’s EBITDA. Additionally, Torstar has a reasonable financial risk profile that has continued to improve since 2006 and generates meaningful levels of free cash flow, which has been used to reduce debt levels.

While the economic downturn hit the revenue and EBITDA profiles of Torstar’s two newspaper businesses, Metroland and Star Media Group (Star Media), in 2009 quite sharply, DBRS has remained focused on attempting to separate the cyclical factors from the structural ones to determine what the level of revenue and EBITDA for these segments will be once the economy improves. Structural factors include the decline of classified advertising – typically in categories such as automotive, real estate and employment as they find other forms of placement and distribution – and declining circulation. DBRS believes that while both Metroland (just over one-third of total revenue and 43% of total EBITDA) and Star Media (just under one-third of total revenue and 20% of total EBITDA) will be challenged to return to previous revenue levels given these structural pressures, meaningful cost reductions in 2008 and 2009 and growth in other areas such as digital should generate reasonable levels of EBITDA for these segments going forward.

DBRS recognizes that Metroland’s community-based newspapers continue to offer local and corporate retail advertisers an effective return on their advertising investment as more than four million weekly copies are delivered to households (a push strategy versus pull strategy in urban dailies) and include retail flyers that have remained steady in terms of volume (3.5 billion pieces in 2009) and actually experienced an increase in advertising revenue during the economic downturn. Furthermore, Metroland’s digital operations, including its directory operation, continue to experience strong growth but remain relatively small overall. While DBRS believes that some of Metroland’s business remains susceptible to ongoing structural challenges, they are much more modest than the ones urban dailies are facing. DBRS notes that, to date, the Internet has not become a significant medium for connecting local readers with advertisers (intermediation) as it has with urban and national dailies. As a result, Metroland’s underlying business model has not been overly disrupted. Finally, DBRS recognizes that this segment is well positioned to adapt its cost structure to ongoing structural changes in the future. As such, DBRS expects EBITDA to improve in 2010 and to be reasonable going forward, albeit below 2008 and 2007 levels.

Star Media continues to face further structural challenges and will likely have to continue to adjust its cost structure to adapt to this new reality as it attempts to grow its digital business, which can be more challenging to attain than for Metroland, with its more flexible cost structure. Despite this, DBRS notes that Star Media continues to have tremendous reach and market share in the Greater Toronto Area (GTA) of over 50% of the readership with its products (including the Toronto Star and Metro). This, combined with a reasonably sized digital business, should continue to serve advertisers in both traditional and online platforms.

Harlequin (at one-third of revenue and just over 40% of EBITDA) continues to demonstrate steady results, even through the latest economic downturn, given the appeal of its publications and the diversification benefits from its multi-channel distribution strategy. While the Retail channel may be challenged going forward, DBRS believe that new global markets and further direct-to-consumer growth, including digital sales (for e-readers, mobile phones and other portable devices), should continue to generate steady levels of EBITDA going forward.

From a financial perspective, DBRS notes that Torstar’s cost savings and lower interest expense as a result of its reduced debt levels have helped mitigate some of the revenue pressure, notably in the newspaper division. This has returned cash flow from operations to pre-2009 levels at about $140 million per year in the latest 12-month period ending March 31, 2010. Furthermore, the reduction in its dividend in 2009 (cut roughly 50% to $29 million) and lower capex levels boosted its free cash flow both in 2009 and in the latest 12-month period ending March 31, 2010 ($95 million). Torstar has not seen such a meaningful level of free cash flow in a number of years.

Overall, DBRS believes that Torstar has responded well to the structural challenges facing its newspaper division and Harlequin continues to generate steady results. In addition to the diversity of its operations, improvements in free cash flow, debt levels and its credit metrics have helped mitigate these structural changes. However, DBRS would become concerned with Torstar’s BBB rating should (1) structural pressures in the newspaper division accelerate and not be manageable by further adjusting its costs; (2) Harlequin’s stable results come under pressure; (3) the trend of improved credit metrics and lower debt levels be reversed; and (4) free cash flow be significantly reduced.

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

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.