DBRS Removes Cogeco from Under Review with Negative Implications

DBRS has today confirmed the ratings of Cogeco Cable Inc.’s (Cogeco or the Company) Issuer Rating and Senior Secured Notes & Debentures at BB (high) and BBB (low)/RR1 respectively, removing them from Under Review with Negative Implications. This action follows DBRS’s review of the Company’s PEER 1 Network Enterprises, Inc. (PEER 1) acquisition, as well as the Company’s proposed issuance of US$400 million of Senior Unsecured Notes, the proceeds of which will be used to refinance Senior Secured Bank Debt. DBRS has also assigned a provisional rating of BB/RR5 to the Company’s proposed US$400 million issuance of Senior Unsecured Notes. The ratings are subject to the closing of the Company’s proposed issuance on terms similar to those publically announced. All trends are Stable.

On December 21, 2012, DBRS placed Cogeco’s ratings Under Review with Negative Implications, following the Company’s announcement that it had entered into an agreement to acquire PEER 1. DBRS stated that its review would focus on the business and execution risk associated with the PEER 1 acquisition, along with the Company’s ability and willingness to restore financial leverage to a level appropriate for its current rating category within a reasonable time frame. On January 29, 2013, Cogeco announced the closing of the PEER 1 acquisition, funded through a $650 million acquisition credit facility (Canadian-dollar equivalent, ranking pari passu with current Senior Secured Notes & Debentures). DBRS did not resolve the Under Review status of Cogeco’s ratings at the time of closing, as DBRS’s understanding was that all or a portion of the amount drawn on the credit facility might be refinanced on terms, or in a form substantively different from the current facility in fairly short order.

DBRS views the business profile impact of Cogeco’s PEER 1 acquisition as neutral to moderately positive. DBRS regards the acquisition and its data services operations as an attractive area of growth. Although data services are seen as a young and evolving industry with high levels of capital required at the outset, encouraging growth prospects may help supplant slowing growth and potential declines from a maturing cable segment subject to increased competition.

With respect to the Company’s financial profile, the acquisition of PEER 1 had increased Cogeco’s pro forma total debt to $3.0 billion and its LTM gross debt-to-EBITDA ratio to approximately 3.8 times from 3.1 times. Although this is a meaningful increase, DBRS believes the Company is both willing and able to de-leverage by a meaningful degree (i.e., to a range of 3.1 to 3.5 times) within 12 to 18 months through EBITDA growth and the use of free cash flow after dividends to reduce bank debt by at least $100 million in each of F2013 and F2014.

As a result of the proposed new issuance, DBRS has concluded that holders of the Company’s Senior Secured Notes & Debentures could likely recover 100% of their value in a default scenario, a level that corresponds with a recovery rating of RR1. As such, in accordance with DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, DBRS has confirmed the rating of Cogeco’s Senior Secured Notes & Debentures at BBB (low), one notch above the Issuer Rating of BB (high).

DBRS has also concluded that the holders of the Senior Unsecured Debt could likely recover 10% to 30% of their value in a default scenario, a level that corresponds with a recovery rating of RR5. As such, in accordance with DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, DBRS has assigned a provisional rating of BB to Cogeco’s Senior Unsecured Debt, one notch below the Issuer Rating of BB (high).

The Stable trends reflect the increased diversification of the Company’s operations and the free cash flow generating capacity of Cogeco’s assets going forward. DBRS notes that inability to grow EBITDA and/or reduce debt to adequate levels over the near term could result in pressure on the Company’s ratings.

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

The applicable methodologies are Rating the Communications Industry and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.