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) with a Stable trend. The rating confirmation reflects both the Company’s stable business risk profile and its generally prudent financial management over the past few years. Any improvement in the rating is likely limited for the time being as the competitive intensity in Canada increases from larger telcos. The rating is also constrained by the fact that DBRS believes Cogeco Cable could pursue additional inorganic growth initiatives in the medium term.

Cogeco Cable’s business risk profile continues to be driven by its Canadian operations, which account for the majority of its revenue and EBITDA (over 87% and 96%, respectively). The Company has benefited from improved operating leverage in Canada, thanks to its bundling efforts to boost subscriber growth in new services such as advanced video, data and telephony and the resulting average revenue per user (ARPU) growth. Favourable results in Canada continue to offset weakness in the Company’s operations in Portugal (Cabovisão-Televisão por Cabo, S.A. (Cabovisão)), which has been challenged by both intense competition and the generally weak economic environment in Europe. As a result of ongoing difficulties, Cogeco Cable wrote down its remaining investment ($226 million) in Cabovisão during Q3 F2011. This was preceded by a writedown of $400 million in F2009. In F2011, Cogeco Cable’s EBITDA increased by nearly 11% to $566 million (on revenue growth of 6%), driven primarily by organic subscriber growth (mostly new services, with some modest basic subscriber growth) and price increases in Ontario and Québec, while Portugal suffered EBITDA pressure as a result of increased subscriber retention efforts.

DBRS expects Cogeco Cable’s business risk profile to remain stable in the near term, despite the ongoing challenges in Portugal. However, over the medium term, competition is expected to increase in Canada as the larger telcos in its service territories begin to offer fixed-line video services and more competitive high-speed Internet services. Despite this, EBITDA is expected to improve over the near term and approach the $600-million mark in F2012, largely driven by the Company’s Canadian operations, with growth in both subscribers and ARPU. The Canadian operations should also benefit incrementally from greater focus on the small and medium-sized enterprise market, as well as from growth in its enterprise business, Cogeco Data Services, both from acquisitions and on an organic basis. Cogeco Cable’s Portuguese operations should continue to experience EBITDA pressure in F2012.

In terms of Cogeco Cable’s financial risk profile, this has steadily improved, reflecting prudent financial management and healthy credit metrics. However, the Company has not ruled out additional acquisitions and does not have a committed leverage target. DBRS believes Cogeco Cable’s healthy balance sheet provides some mitigation to its lack of scale relative to its large telco competitors. The Company continues to benefit from growth in cash flow from operations, which has allowed it to cover higher capex and dividend levels. Cogeco Cable generated nearly $50 million of free cash flow (before working capital), which was largely used to finance its acquisition of Quiettouch Inc., a provider of outsourced managed information technology and infrastructure services in Toronto, and MTO Telecom Inc., the largest private telecommunications provider in the Greater Montréal Area. Both acquisitions enhanced its Cogeco Data Services business. Debt levels remained relatively stable, while EBITDA and cash flow improved as a result of growth in its Canadian cable operations. As such, the Company’s debt-to-EBITDA ratio improved modestly, to 1.70 times, while its credit metrics remain stronger than its current rating category.

Free cash flow (before changes in working capital) is expected to remain positive in F2012 but should be slightly lower than in F2011, with higher capex and dividends despite cash flow from operations continuing to track EBITDA growth in F2012. Capex is expected to increase modestly to around the mid-$300 million level as the Company continues to support further subscriber growth, enhancement of existing facilities as well as the deployment of new technologies that will improve its network efficiency and capacity. Dividends are expected to be higher, at nearly $50 million after three increases in F2011. DBRS anticipates that Cogeco Cable will use its free cash flow in F2012 mostly for small acquisitions. As such, DBRS expects some moderate improvement in the Company’s credit metrics.

Overall, DBRS believes that Cogeco Cable, with its stable business risk profile and healthy credit metrics, is well placed at the BBB (low) level. This assessment considers increased competition from larger telcos over the medium term, with the Company’s healthy balance sheet helping to mitigate any scale disadvantages.

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

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