DBRS Confirms Vidéotron Ltée Ratings

DBRS has today confirmed Vidéotron Ltée’s (Vidéotron or the Company) Issuer Rating at BB (high), its Secured Bank Debt rating at BBB (low), with an RR1 recovery rating, and its Senior Unsecured Notes rating at BB (high), with an RR2 recovery rating. The trends on all ratings are Stable. The confirmation reflects the Company meeting expected growth in broadband and wireless over the past year, combined with improving margins as a result of higher average revenue per user (ARPU) and greater bundling. Vidéotron’s ratings would likely be classified as investment grade if it were a stand-alone entity, as the business profile continues to be supported by Vidéotron’s strong market position in Québec and the Company’s ability to grow both wireline and more recently, wireless services. However, DBRS notes that Vidéotron’s Issuer Rating remains constrained by the leverage and business mix of its holdco parent, Quebecor Media Inc. (QMI), which depends on cash distributions from Vidéotron and its sister companies to support its own financing costs and fund its dividends. DBRS’s ratings also take into account increasing competition in Québec and the Company’s maturing cable television subscriber base.

The earnings profile of Vidéotron remained fairly stable in H1 2013, due to steady subscriber growth, increased ARPU and strong consolidated operating margins. Total revenues increased by 4.2% to just over $1.3 billion in H1 2013 over the same period prior. Consolidated ARPU rose to $115.86 in H1 2013, compared with $109.98 last year. The increases were largely a result of increased bundling, price hikes and higher value wireless customers. Vidéotron’s financial profile also remained relatively steady, bolstered by the Company’s growing free cash generating capacity and lower capital intensity within its wireless division. DBRS notes that on June 17, 2013, Vidéotron issued $400 million of senior notes primarily to finance the redemption and retirement of a portion of the Company’s issued and outstanding 9.125% senior notes due 2018, resulting in a temporary spike in leverage. The Company’s last 12 months (LTM) pro forma gross debt-to-EBITDA ratio fell to 2.05 times (x) from 2.24x after the completion of the refinancing in July. DBRS notes that Vidéotron maintains a strong LTM EBITDA interest coverage ratio of 7.07x.

DBRS expects Vidéotron’s earnings profile to remain stable over the near-to-medium term based on modest revenue growth, strong margins, a loyal customer base and the upside of a growing wireless offering. That said, DBRS will continue to monitor the increasing competition in Québec and its effect on the Company’s mature cable subscriber base. Management suspects that roughly 50% to 60% of Vidéotron’s footprint currently faces IPTV competition. DBRS expects the overlap to rise significantly within the next two years, a trend that may place pressure on the Company’s subscriber growth going forward. DBRS forecasts revenues to increase to between $2.65 billion and $2.8 billion in 2014 as a result of modest PSU growth, higher prices and a continued focus on bundling. Wireless revenue is expected to grow on the basis of accelerated subscriber growth and ARPU rising to the low-to-mid $50 range. DBRS expects operating margins to remain relatively stable, resulting in EBITDA in the range of $1.2 billion to $1.3 billion next year.

DBRS expects the core financial profile of Vidéotron to remain relatively steady going forward. DBRS expects Vidéotron to use cash flow to continue to improve network infrastructure and 4G deployment. Wireless capex seems to have reached an inflection point in 2012. DBRS expects capex in 2013 to fall between $525 million and $600 million versus $740 million last year. DBRS believes Vidéotron will be able to decrease capex spending going forward, especially following the Company’s long-term evolution (LTE) build-out agreement with Rogers Communications Inc. (Rogers). Capital outlays in 2014 could rise if Vidéotron is successful in its bid for the one prime block reserved for new entrants in the 700 MHz wireless spectrum auction. DBRS believes Vidéotron, if successful in bidding, may look to finance the purchase with a modest amount of debt. DBRS notes that cash dividends fluctuate from year to year as they are largely based on the financial decisions of the consolidated entity. DBRS also notes that the Company’s financial policy and its apportioned debt levels are flexible given its relationship with the QMI holding company.

After examining a wide range of factors, DBRS has concluded that holders of the Secured Bank Debt would 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 thus confirmed the security rating of BBB (low) for Vidéotron’s Secured Bank Debt, one notch above the Issuer Rating of BB (high). DBRS has also concluded that the holders of the Senior Unsecured Notes could likely recover 80% to 100% of their value in a default scenario, a level that corresponds with a recovery rating of RR2. In accordance with these criteria, DBRS has confirmed the security rating of BB (high) for Vidéotron’s Senior Unsecured Notes, in line with the Issuer Rating of BB (high).

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.