DBRS Confirms Quebecor Media Inc. Issuer Rating at BB (low), Stable Trend

DBRS has today confirmed Quebecor Media Inc.’s (QMI or the Company) Issuer Rating at BB (low), its Secured Debt at BB (high), with a recovery rating of RR1, and its Senior Notes rating at BB (low), with a recovery rating of RR4. The trends are all Stable.

QMI’s corporate Issuer Rating is based on its own leverage and the supporting 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 group for the past number of years, which has reduced its financial risk and indirectly the financial risk of QMI.

Vidéotron continues to benefit from subscriber growth in digital, high-speed Internet and telephony, with a rising number of subscribers taking two or three of its services. This is in a marketplace that remains highly competitive, with satellite and telco operators also providing these services and continuing to invest in their networks to enhance their services (e.g., the telcos with fibre deployments are bolstering their data speeds, which allows them to launch terrestrial video services). DBRS notes that, on September 9, 2010, with a goal of adding wireless service to its bundles, Vidéotron deployed its own wireless network in Québec and, in doing so, has entered a very competitive market, battling incumbents and other new entrants alike. Vidéotron’s bundling efforts have been successful thus far and have unlocked the Company’s operating leverage, driving EBITDA growth and improved EBITDA margins to 49% in the latest period – a very strong level for a North American cable operator. Bundling has also driven average revenue per user (ARPU) levels to near $95 per month in Q2 2010 ($51.86/month in 2005) and lowered subscriber churn levels.

Although DBRS notes that Sun Media’s business risk profile remains under some structural pressure, it appears to be managing this with significant changes in its cost structure while maintaining a healthy financial risk profile. DBRS believes that most of the revenue pressure that Sun Media has experienced over the past 30 months remains cyclical, driven by the downturn in the Canadian economy. However, beyond this cyclical pressure, DBRS believes that Sun Media continues to experience ongoing secular trends as advertisers and readers shift to online formats. The Company is attempting to combat this by moving an increasing amount of its content online, ramping up its free daily offerings in most major markets and significantly streamlining its cost structure.

DBRS expects that Vidéotron, Sun Media, Osprey Media and the Company’s other subsidiaries will have the capacity to contribute over $500 million in cash distributions to QMI in 2010, which should more than cover expected interest and corporate expenses, QMI’s external dividend payment and the QMI debt reduction that was completed early in 2010. In addition, QMI continues to maintain good liquidity, with roughly $100 million available under its undrawn revolving credit facility. With Vidéotron pre-funding its wireless build which will peak in 2010 and the other operating subsidiaries generating surplus cash flow, DBRS expects QMI to be able to maintain its ratings at the current level. QMI could improve its ratings in the future should it continue to make progress on achieving lower leverage from a consolidated basis – largely driven by improvement in its operating subsidiaries. However if the subsidiaries’ cash flows were to decline or if their capex becomes aggressive, leading to increased leverage at their level or that of QMI, QMI’s ratings could come under pressure.

DBRS has simulated a default scenario for QMI over the 2010 to 2013 time frame to assess the prospects for recovery for creditors at the corporate level under certain assumptions. At a distressed valuation level, DBRS notes that QMI’s Secured Debt (assuming $750 million is outstanding) has outstanding recovery prospects of 90% to 100% under a distressed scenario. As such, DBRS has confirmed QMI’s Secured Debt recovery rating at RR1 and its instrument rating at BB (high), two notches above its 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.

DBRS notes that QMI’s Senior Notes ($1.29 billion outstanding) have average recovery prospects of 30% to 50% under a distressed scenario. As such, DBRS has confirmed QMI’s Senior Notes recovery rating at RR4 and its instrument rating at BB (low), which is the same as its Issuer Rating.

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

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