DBRS Assigns an Issuer Rating of BB (high) to Cogeco Cable Inc. Following the Acquisition of Atlantic Broadband

DBRS has today assigned an Issuer Rating of BB (high) with a Stable trend to Cogeco Cable Inc. (Cogeco or the Company) and has confirmed the rating of BBB (low) on Cogeco’s Senior Secured Notes & Debentures with a recovery rating of RR1. This action follows DBRS’ assessment of the Company’s proposed acquisition of Atlantic Broadband Group, LLC (Atlantic Broadband) and removes the Senior Secured Notes & Debentures rating from Under Review with Negative Implications.

On July 18, 2012, DBRS placed the rating of Cogeco Under Review with Negative Implications following the Company’s announcement that it had entered into a definitive agreement to acquire Atlantic Broadband for USD 1.36 billion ($150 million cash on hand, $550 million from its existing credit facility and the assumption of $660 million of borrowings under committed non-recourse debt financing at Atlantic Broadband).

Atlantic Broadband is a privately owned, independent cable system operator serving approximately 252,000 basic video customers in Pennsylvania, Florida, Maryland, Delaware and South Carolina. It was formed in 2003 and is the 14th largest cable television system operator in the United States, providing analog and digital video, as well as high-speed internet and telephony services. Atlantic Broadband generated revenue of USD 329 million and EBITDA of approximately USD 149 million in 2011. Cogeco believes the acquisition provides an attractive entry into the U.S. market and provides the Company with a platform for further growth and penetration by leveraging its core competencies.

Despite the potential upside from the acquisition, DBRS believes Cogeco is best positioned in the BB (high) rating category with a Stable trend, based on the execution risk and increased financial leverage associated with the acquisition, combined with the competitive pressures the Company is facing in Canada.

In its review, DBRS focused on (1) Cogeco’s potential to execute and compete effectively in both its new and existing markets and (2) the Company’s financial management intentions going forward, including the willingness and ability to restore financial leverage to an appropriate level within a reasonable time frame.

Cogeco believes its acquisition of Atlantic Broadband increases the Company’s growth potential and provides it with an entry point into the U.S. market. Management has emphasized that Atlantic Broadband’s digital video, high-speed internet and phone penetration stand significantly lower than its peer group, which comprises Comcast Corporation, Cablevision Systems Corporation, Charter Communications, Suddenlink Communications and Time Warner Cable Inc. Management also notes that Cogeco may be able to increase Atlantic Broadband’s average revenue per user (APRU) and improve revenue growth through bundling, as only 21% of Atlantic Broadband’s customers subscriber to all services offered compared to 36% for Cogeco. In addition, DBRS notes that Atlantic Broadband also experiences lower levels of Internet protocol television (IPTV) competition in its core regions and maintains significant exposure to growth in the commercial sector.

On the other hand, DBRS believes that Atlantic Broadband’s competition may intensify over time, and increasing market share may prove difficult given Atlantic Broadband’s smaller-scale operations. In terms of synergies, DBRS notes that opportunities for cost reduction are limited as Atlantic Broadband and Cogeco operate in different regions. Although Cogeco believes it can leverage technology and increase its bargaining power, DBRS does not perceive these cost reductions to be substantial.

In terms of business risk profile in Canada, Cogeco has been minimally affected by fiber network operators. To date, Telus Corporation and Bell Canada have established roughly 80,000 and 125,000 homes passed, respectively, in Cogeco’s markets. This represents roughly one tenth of Cogeco’s homes passed, significantly less than overlaps of approximately 50% faced by the Company’s cable competitors. DBRS believes that modest near-term competition will offer Cogeco more time to solidify its subscriber base and invest in competitive product offerings. However, as pressure from IPTV competition increases, DBRS expects that growth in cable may slow and margins could come under pressure.

In terms of financial profile, the acquisition of Atlantic Broadband will result in a meaningful increase in Cogeco’s leverage, which DBRS believes is not consistent with the previous rating. DBRS estimates that Cogeco’s pro forma F2012 debt-to-EBITDA would increase to approximately 3.1 times (x) (based on a debt balance of $2.3 billion), from 1.6x for the 12 month period ending May 31, 2012. Although Cogeco should remain free cash flow positive, the magnitude of such is expected to be relatively modest. DBRS forecasts that Cogeco’s free cash flow (after dividends) will be close to $100 million per year for the first and second year after the acquisition. That said, DBRS believes Cogeco’s ability to deleverage by a meaningful degree in a 12 to 24 month time frame is limited. DBRS also notes that Cogeco management stated that Atlantic Broadband provides an entry point into the U.S., suggesting the Company may consider further acquisitions in the future.

As such, DBRS believes Cogeco is best positioned in the BB (high) rating category with a Stable trend, particularly in the context of an intensifying competitive environment in Canada and increasing shareholder expectations.

Since Cogeco’s Issuer Rating now stands at BB (high) and is no longer considered investment grade, DBRS Criteria: Rating Leveraged Finance is applicable. Specifically, the assessment of recovery prospects on specific debt securities for the purpose of establishing credit ratings on those respective debt securities. With regards to Cogeco, DBRS has concluded that it is likely that holders of the Senior Secured Notes & Debentures would recover 100%, reflected by a recovery rating of RR1. Although securities with an RR1 recovery rating are typically assigned a rating three notches above the issuer rating, the notching is limited to cap security ratings at BBB (low). As such, DBRS has assigned a rating of BBB (low) to Cogeco’s Senior Secured Notes & Debentures.

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

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