DBRS Confirms Quebecor Media Inc. at BB (high) and BB (low)

DBRS has today confirmed Quebecor Media Inc.’s (QMI or the Company) Issuer Rating at BB (low), its Secured Bank Debt rating 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 Ltée (Vidéotron; Issuer Rating at BB (high), see separate press release) and Sun Media. Vidéotron’s strong operating performance has driven earnings growth for the group for the past several years, which has reduced its own financial risk and, indirectly, the financial risk of its parent QMI.

Vidéotron continues to benefit from subscriber growth in digital, high-speed Internet and telephony, with a rising number of subscribers taking multiple 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 offer terrestrial video services). DBRS notes that, in September 2010, Vidéotron launched its own wireless network in Québec and in doing so will enter a very competitive market, battling incumbents and other new entrants alike. (Vidéotron spent over $550 million on spectrum licenses in 2008, with total investment expected to exceed $1 billion over roughly five years.) Vidéotron’s bundling efforts have been successful thus far and have unlocked operating leverage, driving EBITDA growth and improved EBITDA margins. However, its wireless network and subscriber loading costs are expected to be a drag on EBITDA and EBITDA margins over the next couple of years. Bundling has also driven average revenue per user (ARPU) levels to over $102 per month in Q2 2011 ($51.86/month in 2005).

DBRS notes, however, that QMI’s News Media and Broadcasting segments remain under some structural pressure and there has been reinvestment in these businesses to reposition them for the future. News Media appears to be managing the structural changes 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 while reinvesting in new publications and moving to an unleveraged position at Sun Media, which now includes Osprey Media. This allows for all free cash flow from Sun Media to be distributed to QMI.

DBRS expects that Vidéotron, Sun Media and the Company’s other subsidiaries will have the capacity to continue to contribute meaningful cash distributions to QMI in 2011 and 2012, which should more than cover QMI’s expected interest, corporate expenses and external dividend payment. In addition, QMI maintains good liquidity, with roughly $100 million available under its undrawn revolving credit facility. DBRS expects QMI to be able to maintain its ratings at the current level. QMI could improve its ratings in the future if it continues to make progress in achieving lower leverage on a consolidated basis. This would largely be driven by improvement in its operating subsidiaries. However, if cash flows from the subsidiaries were to decline or if their capex or additional investments become aggressive, leading to increased leverage at their level or at QMI, QMI’s ratings could come under pressure.

DBRS has simulated a default scenario for QMI over the 2011 to 2013 time frame to assess the recovery prospects at the corporate level under certain assumptions. At a distressed valuation level, DBRS notes that QMI’s Secured Debt has outstanding recovery prospects of 90% to 100%. 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. A rating of two notches above the Issuer Rating is given to this secured debt (even though with the RR1 rating, three notches 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.

QMI’s Senior Notes ($1.6 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.

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

The applicable methodologies are Rating the Printing Industry, DBRS Rating Methodology for Leveraged Finance and Rating Parent/Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.