DBRS Confirms Quebecor Media Inc.’s Ratings

DBRS has today confirmed the Issuer Rating of Quebecor Media Inc. (QMI or the Company) at BB (low), its Secured Bank Debt rating at BB (high), with an RR1 recovery rating, and its Senior Notes rating at B (high), with an RR5 recovery rating. The trends on all ratings are Stable. The confirmation reflects steady growth within the Company’s telecommunication segment over the past year. The ratings continue to be supported by Vidéotron Ltée’s (Vidéotron) strong market position in Québec and the Company’s ability to grow both wireline and more recently, wireless services. DBRS’s ratings also take into account Vidéotron’s maturing cable television subscriber base, increasing competition in Québec and QMI’s struggling News Media segment.

On August 1, 2013, DBRS downgraded QMI’s Senior Notes rating to B (high) from BB (low) based on the Senior Notes’ recovery prospects in a default scenario falling from RR4 to RR5. These actions followed the Company’s announcement to raise approximately $350 million of Secured Bank Debt and concurrently redeem a portion of its 7.75% unsecured Senior Notes due 2016.

In regards to QMI’s earnings profile, steady subscriber growth, increased average revenue per user (ARPU) and strong margins from Vidéotron were largely offset by softer demand in the News Media segment. DBRS expects QMI’s earnings profile to remain relatively stable over the near term, based on moderate sales growth and strong margins from Vidéotron. DBRS remains concerned about the Company’s News Media segment and will continue to carefully monitor how QMI reacts to a structural transition toward digital media and a weaker advertising market. DBRS notes that after the completion of refinancings at both the QMI and Vidéotron levels, post H1 2013, the Company’s gross debt-to-EBITDA ratio stands at 3.53 times (compared to under 2.9 times before the Caisse de dépôt et placement du Québec (CDP) buyout).

DBRS believes that QMI intends to reduce its leverage ratio primarily through growth in operating income at Vidéotron going forward and expects that the Company could achieve a consolidated debt-to-EBITDA ratio of approximately 3.0 times by the end of 2015. That said, DBRS notes that a bid for spectrum in the 700 MHz wireless auction in early 2014 by wholly-owned subsidiary Vidéotron could delay the consolidated deleveraging process by a year.

DBRS notes that QMI’s subsidiaries Vidéotron and Sun Media Corporation support both interest payments and dividends at the QMI holding company level. DBRS estimates that, going forward, total interest expense at the QMI holding company will amount to approximately $165 million to $170 million annually as a result of the debt offerings in late 2012 (vs. $130 million in 2012). QMI will continue to pay cash dividends of $100 million per annum going forward. DBRS expects that Vidéotron will have the capacity to absorb QMI’s rising finance expenses over the near-to-medium term, based on Vidéotron’s cash generating capacity and current debt levels.

In terms of inter-corporate debt allocation, Vidéotron may raise debt in order to reduce borrowings at QMI in the future while aiming to maintain a consolidated leverage ratio consistent with past practice. However, the timing and amounts associated with such a decision are uncertain. 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.

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 BB (high) for QMI’s senior Secured Bank Debt, two notches above the Issuer Rating of BB (low). DBRS has also concluded that the holders of the unsecured Senior Notes could likely recover 10% to 30% of their value in a default scenario, a level that corresponds with a recovery rating of RR5. In accordance with these criteria, DBRS has confirmed the security rating of B (high) for QMI’s unsecured Senior Notes, one notch below the Issuer Rating of BB (low).

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

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