DBRS Downgrades Torstar to BBB (low), Stable Trend

DBRS has today downgraded the Issuer Rating of Torstar Corporation (Torstar or the Company) to BBB (low) from BBB. The trend is Stable and the rating is no longer Under Review with Negative Implications. The downgrade reflects DBRS’s view that Torstar’s earnings profile has been structurally affected by a consumer shift to digital forms of media as the Company has struggled to sustain organic revenues and profitability. The new rating also reflects DBRS’s view that weakening demand will continue to place pressure on the Company’s revenues, margins and cash flow generation going forward. DBRS’s concern is not based primarily on the Company’s debt level, as Torstar has remained prudent in terms of financial management, but rather the Company’s income and cash-generating prospects.

On July 19, 2012, DBRS placed the ratings of Torstar Under Review with Negative Implications. This action followed DBRS’s update of the applicable industry methodologies (i.e., Rating the Newspaper and Magazine Publishing Industry and Rating the Printing Industry), which involved lowering the Industry Business Risk Ratings (BRR). For each of the two industries, the BRR was reduced to the BB (high)/BB range from BB (high). The rationale for the methodology change was based on DBRS’s view that the highly competitive industry is being increasingly affected by the structural transition toward digital media, applying pressure to traditional printing revenue.

In its review of Torstar, DBRS focused on the Company’s potential to adapt to the changing environment and assessed the Company’s prospects going forward.

Torstar’s organic revenue and operating profit growth began to turn negative in ear1y 2012 and continued to decline on a year-over-year basis in recent quarters. As such, organic revenue has decreased by 4%, or $42 million, for the nine months ended September 30, 2012, over the same period prior. Furthermore, operating income over the same period has decreased by approximately 11%, or $18 million. These declines can largely be attributed to a softer advertising market in Torstar’s Media Segment, combined with weaker demand in the Company’s Book Publishing Segment. As such, Torstar has reacted to the difficult circumstances facing the industry by focusing on small-to-medium-sized digital acquisitions. The Company has also focused on various cost-saving initiatives. The longer-term effectiveness of these initiatives in terms of achieving consolidated organic revenue and EBITDA growth remains difficult to gauge.

In terms of financial profile, Torstar has remained prudent, preserving credit metrics by using much of its free cash flow over the past few years to repay debt. DBRS notes that the concern it has over Torstar’s credit risk profile is not based primarily on the Company’s debt level, but rather the Company’s income and cash-generating prospects going forward.

Looking forward, the Company’s profitability and success will depend on its ability to develop a sustainable revenue model for its digital platforms. DBRS notes that Torstar’s Issuer Rating could come under pressure as a result of a continued and meaningful decline in organic revenue and operating income and/or key credit metrics over the near to medium term.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating the Newspaper and Magazine Publishing Industry (July 2012) and Rating the Printing Industry (July 2012), which can be found on our website under Methodologies.