DBRS Confirms Ratings of Cogeco Cable Inc., All Trends Stable

DBRS has today confirmed Cogeco Cable Inc.’s (Cogeco or the Company) Issuer Rating at BB (high), its Senior Secured Notes & Debentures rating at BBB (low), with a recovery rating of RR1, and its Senior Unsecured Notes rating at BB, with a recovery rating of RR5. All trends remain Stable. The confirmation reflects the Company’s ability and willingness to reduce financial leverage by a meaningful degree (i.e., to a range of 3.1 to 3.5 times (x), from 3.7x currently) within the next 12 months, following the recent debt-financed acquisitions of PEER 1 Network Enterprises (PEER 1) and Atlantic Broadband Group, LLC (ABB). The ratings continue to be supported by the Company’s established footprint in existing markets and the growth potential of data services, while reflecting increasing competition in Canada and the Company’s maturing cable subscriber base.

Cogeco’s Canadian operations remained fairly stable, as a result of relative steady operating results from its Canadian subscriber base and the ongoing integration of recent acquisitions. DBRS notes that revenue growth over the past year was primarily a result of rate increases as Cogeco’s Canadian cable television subscriber base has continued its trajectory of declines quarter over quarter, while subscriber growth in high-speed internet and telephony subscribers has decelerated.

After Cogeco’s acquisition of Atlantic Broadband in 2012, DBRS assigned the Company an Issuer Rating of BB (high). DBRS believed Cogeco was best positioned in the BB (high) rating category, based on the execution risk and increased financial leverage associated with the acquisition, combined with the existing pressure on its Canadian subscriber base. In early 2013, DBRS confirmed Cogeco’s ratings following its acquisition of PEER 1, as DBRS believed encouraging growth prospects may help supplant slowing growth and potential declines from a maturing cable segment. DBRS notes Cogeco’s substantial increase in leverage after its two debt-financed acquisitions. Cogeco’s gross debt-to-EBITDA ratio increased to 3.1x from 1.6x following the ABB acquisition, rising further to 3.8x as a result of the Peer 1 purchase.

DBRS expects the earnings profile of Cogeco to remain relatively stable in the near term as the Company continues to focus on acquisition integration and execution. DBRS will continue to focus on the competitive landscape, Cogeco’s Canadian subscriber base and the operating performance of Cogeco’s acquisitions going forward. Although Cogeco currently benefits from limited overlap with its telco competitors, the Company must continue to enhance its service offerings as IPTV deployment expands. The Company must also focus on growing its ABB operations and expanding its data services offerings to diversify its revenue streams over the longer term.

DBRS expects the Company’s financial profile to become consistent with its current rating categories, based on the strength of its cash generating capacity and the Company’s willingness and ability to de-lever. DBRS believes Cogeco will decrease leverage by a meaningful degree (i.e., to a range of 3.1x to 3.5x, from approximately 3.7x currently) within 12 months through EBITDA growth and the use of free cash flow after dividends to reduce bank debt by at least $150 million (on a consolidated basis) in F2014.

DBRS has concluded that holders of the 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. In accordance with the criteria DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, DBRS has confirmed a security rating of BBB (low) for Cogeco’s Senior Secured Notes & Debentures, 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. Also in accordance with these criteria, DBRS has confirmed a security rating of BB for Cogeco’s Senior Unsecured Debt, one notch below the Issuer Rating of BB (high).

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

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