DBRS Confirms Cogeco Cable Inc. at BBB (low), Stable Trend

DBRS has today confirmed the Senior Secured Notes & Debentures rating of Cogeco Cable Inc. (Cogeco Cable or the Company) at BBB (low). The trend is Stable. The rating confirmation reflects stable operating performance, primarily resulting from the operating leverage Cogeco Cable is benefitting from in Canada with bundling efforts continuing to drive growth in new services, offset somewhat by the Company’s operations in Portugal (Cabovisão-Televisão por Cabo, S.A. (Cabovisão)), 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 recent years. In addition, DBRS notes that the financial risk profile for Cogeco Cable remains healthy as organic growth and small acquisitions in recent years have driven growth in EBITDA and cash flow from operations, while debt levels have been reduced to below $1 billion from their peak of $1.3 billion in F2006.

DBRS believes Cogeco Cable’s balanced business risk profile should continue, provided its Canadian operations can continue to demonstrate good EBITDA growth, allowing it to offset possible continued EBITDA suppression in Portugal as a result of the Company’s competitive repositioning efforts in F2010. 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 $103 per month in Canada), reduce churn levels and continue to drive the operating leverage of Cogeco Cable’s Canadian operations. DBRS notes that the Company’s EBITDA margins in Canada are healthy for a cable operator at just below 45%, with the expectation these will remain relatively stable going forward.

DBRS notes that the retention and marketing initiatives that Cogeco Cable has undertaken in Portugal over the past year appear to be effective, with subscriber growth returning following an intense competitive environment in F2009 as competitors and Cogeco Cable battled for each other’s subscribers. However, revenue and EBITDA continue to decline with heavy promotion and retention spending being pursued to encourage subscriber retention and promote bundling. In the near term, DBRS expects these initiatives to continue, and, coupled with the economic downturn in Portugal and a high Canadian dollar, are likely to preclude EBITDA improvement in Portugal in the near term. While DBRS continues to follow Cogeco Cable’s progress in Portugal closely, the Company’s business risk profile continues to be driven by its Canadian operations, which generate roughly 80% of revenue and over 90% of EBITDA.

DBRS expects continued EBITDA growth on a consolidated basis with F2011 expected to see EBITDA improve to around $530 as a result of growth in Canada, while EBITDA improvement in Portugal is unlikely in the near term. DBRS expects a modest improvement in free cash flow in F2011 with cash flow from operations growth as capex levels remain elevated for the second concurrent year due to a focus in Canada on DOCSIS 3.0 upgrades and other network enhancements and investments. DBRS notes that while Cabovisão is non-recourse to the Canadian operations, there could continue to be modest levels of negative free cash flow for Portugal in F2011.

DBRS does anticipate Cogeco Cable’s credit metrics to improve incrementally in F2011, with growth in EBITDA and cash flow from operations, and relatively stable debt levels. DBRS notes that Cogeco Cable has good liquidity with a recently renewed credit facility that now expires in July 2014 and manageable debt maturities until the end of F2014.

Overall, DBRS believes that Cogeco Cable, 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, after appearing to have stabilized in terms of subscribers, 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.

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

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