DBRS Confirms Quebecor Media Inc. at BB (low)/BB (high), Trend Stable

DBRS has today confirmed the Issuer Rating of Quebecor Media Inc. (QMI or the Company) at BB (low), its Secured Bank Debt at BB (high), with a RR1 recovery rating, and its Senior Notes rating at BB (low), with a RR4 recovery rating. The trends on all ratings are Stable

The confirmation follows QMI’s announcement that it intends to repurchase approximately 20 million shares from Caisse de dépôt et placement du Québec (CDP) for $1 billion, expected to be financed by debt. At the same time, Quebecor Inc., which owns 54.7% of QMI, will purchase ten million QMI shares from CDP in exchange for $500 million Subordinated Convertible Debentures due 2018. Together, these two transactions will reduce CDP’s ownership in QMI from 45.3% to 24.6%.

DBRS estimates that the incremental debt at QMI will increase its consolidated gross last twelve months (LTM) debt-to-EBITDA from 2.9 times to 3.6 times on a pro forma basis. This transaction follows a period of noted deleveraging over the past two to three years, and will bring QMI’s leverage back to the higher end of DBRS’s range for the current rating category (and to the level reported at the end of 2008). DBRS believes that QMI intends to reduce its leverage ratio primarily through growth in operating income at its subsidiary levels going forward and expects that the Company could achieve a consolidated debt-to-EBITDA ratio of 3.3 times by the end of 2014. That said, DBRS notes that a bid for spectrum in the 700 MHz wireless auction in early 2013 by wholly-owned subsidiary Vidéotron Ltée (Vidéotron; see separate press release) could delay the consolidated deleveraging process by a year.

In terms of flows, DBRS assumes the incremental interest expense associated with the additional $1 billion of debt at QMI will essentially be carried with a corresponding increase in distribution from Vidéotron as we expect QMI to maintain the level of cash dividend to its shareholders at $100 million per annum. DBRS expects that Vidéotron will have the capacity to absorb the higher distributions to QMI over the near to medium term, based on its cash generating capacity and current debt levels.

DBRS notes that the ratings of QMI could come under pressure if credit metrics deteriorate from current levels as a result of weakness in operating income and/or an increased debt level within the consolidated entity.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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

The applicable methodologies are Rating the Newspaper and Magazine Publishing Industry, Rating the Communications Industry, Rating the Printing Industry, DBRS Criteria: Rating Leveraged Finance and Rating Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.