DBRS Assigns Issuer Rating of BBB, Stable Trend to Torstar Corporation

DBRS has assigned an Issuer Rating of BBB with a Stable trend to Torstar Corporation (Torstar or the Company). The Company’s business and financial profile supports a rating well above the general rating for the newspaper and magazine publishing industry. At the same time, DBRS has today discontinued Torstar's Medium-Term Notes rating due to repayment.

Underpinning the Company’s solid business profile is, (1) product diversification which helps to reduce volatility in earnings, (2) leading market share for book publishing segment (Harlequin Enterprises Limited) (Harlequin) and the Toronto Star within their business sectors, and (3) strong local market position in community papers along with a favourable cost structure. The rating also reflects Torstar’s improved operating performance during 2010, with EBITDA margins reaching highs of over 15%, strong cash flows and lower debt levels resulting in solid coverage and leverage metrics. Going forward, DBRS expects that overall EBITDA will be essentially flat in 2011 compared to 2010.

Ongoing cost-cutting measures and strong performance in the Star Media group (related to digital and national advertising) will be offset by weaker results for Metroland Media (due to ongoing investments and structural pressures) and Harlequin (due to foreign exchange headwinds). 2011 free cash flows (before working) capital are also expected be lower compared to 2010 due to higher capex spending, higher dividends and higher pension contribution payments, but are expected to be meaningful enough to finance growth, either organically or through acquisitions. In April 2011, the Company sold its investment in CTVglobemedia Inc. (CTV) and used proceeds to further reduce debt. This resulted in significant financial flexibility which allows the Company to readily fund small- to medium-sized acquisitions and still have a financial profile that remains in line with the rating. Limiting the upside to the rating are the structural pressures affecting the newspaper industry, with classified advertising declining and circulation figures falling as readers migrate to the Internet, while the book publishing business also experiences structural changes related to increased digital sales.

Even though Torstar’s newspaper and digital business (Star Media and Metroland Media) saw growth in revenues and EBITDA during 2010 compared to 2009, they were still below pre-recession levels (2007). Going forward, EBITDA for the Media Segment in 2011 is expected to improve with ongoing cost-cutting measures and on the back of higher EBITDA generated by Star Media partly offset by slightly lower operating results for Metroland Media. Star Media is expected to see EBITDA growth in its digital space as benefits from 2010 acquisitions are recognized. In addition, national advertising revenues are expected to improve and keep pace with the economic recovery. Metroland Media will continue to be hampered by structural factors which include the decline of classified advertising – typically in categories such as automotive, real estate and employment as well as local retail advertising. DBRS notes that local retailers pulled back on ad spending in local newspapers when the recession hit and have yet to fully come back. In addition, Metroland Media’s results will be hit as it continues to invest in new community newspapers to expand its geographic footprint and retail distribution. These investments are expected to help Metroland Media improve its operating results in the future.

Harlequin (at one-third of revenue and just over 35% of EBITDA) continues to demonstrate steady results year-over-year given the appeal of its publications and the diversification benefits from its multi-channel distribution strategy. However, print sales have been under pressure reflecting a shift away from printed books to digital books. Going forward, DBRS believes that new global markets, additional cost-cutting measures and further growth in digital sales (for e-readers, mobile phones and other portable devices), should continue to generate steady levels of EBITDA. A continuing strong Canadian dollar will be a headwind to results on a reported basis since approximately 95% of Harlequin’s revenues are generated outside Canada.

Further supporting the rating is Torstar’s financial profile which has strengthened in the last 18 months. Solid free cash flows generated during 2010 were used to reduce debt, resulting in a debt-to-EBITDA ratio that was below 2 times as at December 31, 2010. The Company’s financial profile received a significant boost in April 2011 when proceeds from the sale of investment in CTV were used to reduce debt levels to approximately $150 million compared to approximately $400 million in at the end of Q1 2011. This has resulted in sufficient flexibility allowing Torstar to adapt to ongoing structural changes in the newspaper business. The Company will be able to invest future cash flows for growth (both through acquisition and organic) and still remain in line with the rating.

As the Company copes with the structural pressures of the newspaper business, DBRS expects that the financial profile will remain strong, keeping the Company well positioned in the current rating category.

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.