DBRS Downgrades Corus’s Issuer Rating to BBB (low) and Senior Unsecured Notes to BB (high)

DBRS has today downgraded Corus Entertainment Inc.’s (Corus or the Company) Issuer Rating to BBB (low) from BBB and Senior Unsecured Notes rating to BB (high) from BBB (low), removing the ratings from Under Review with Negative Implications. All trends are Stable. These actions are a result of the Company’s intentions to fund the purchase of certain television assets from Bell Media Inc. (Bell Media) and Shaw Media Inc. (Shaw Media) for a net acquisition price of $481 million financed with bank debt and cash on hand. DBRS notes that Corus has received approval from the Canadian Radio-television and Telecommunications Commission (the CRTC) to acquire these assets.

On March 4, 2013, DBRS placed Corus’s ratings Under Review with Negative Implications as DBRS was concerned that the acquisition, if financed with debt, would weaken Corus’s financial risk profile beyond levels appropriate for the current rating category. Corus has confirmed that more than $400 million of the net acquisition amount will be financed through the Company’s revolving credit facility, which will result in Corus’s pro forma consolidated debt balance rising to more than $950 million from $550 million previously. As such, Corus’s pro forma last-12-months (LTM) gross debt-to-EBITDA ratio would increase to approximately 3.0 times (x) from 2.0x previously (not adjusted for operating leases) based on DBRS estimates of pro forma LTM EBITDA of approximately $320 million.

Although the Company is expected to direct approximately $100 million of free cash flow toward debt repayment in each of F2014 and F2015, DBRS believes the magnitude of leverage and the pace of deleveraging will not enable Corus to maintain a financial profile that is commensurate with the previous ratings.

DBRS notes that the Company’s Senior Unsecured Notes (BB (high)) are rated one notch below its Issuer Rating (BBB low), as Corus’s bank debt ranks senior to its notes. The banks hold as collateral a first-ranking charge on all assets and undertakings of Corus and certain Corus subsidiaries, as designated under the credit agreements.
The CRTC has approved Corus’s agreement with Bell Media to acquire the 50% remaining ownership interest in TELETOON. The CRTC has also approved the Company’s agreement with Bell Media and Shaw Media to acquire each of their respective 50% interests in the French-language specialty channels Historia and Séries+. Corus believes that these acquisitions will provide opportunities for enhanced growth, help bolster scale and diversify the Company’s asset base.

Corus’s ratings are supported by the Company’s established Canadian market positions in television and radio, while reflecting the cyclical and mature nature of the market, as well as the evolving competitive environment. DBRS expects Corus’s earnings profile to remain relatively stable over the near term. That said, DBRS notes that the Company’s revenue and operating income growth over the longer term will be heavily dependent on its ability to increase advertising revenue and pay-TV subscribers, given the less predictable nature of the Company’s merchandise sales.

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.

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

The applicable methodologies are Rating Companies in the Television Broadcasting Industry and Rating Companies in the Radio Broadcasting Industry, which can be found on our website under Methodologies.