DBRS Confirms Cogeco Cable Inc.’s Ratings, 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 deleveraging as expected 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 the Company’s maturing cable subscriber base and increasing competition in Canada.

Cogeco’s revenue for the nine months ended May 31, 2014, increased by 19.3% over the same period prior, rising to over $1.4 billion primarily as a result of the full period inclusion of revenues from Peer 1 and ABB. The Company’s consolidated operating performance over the past year also benefitted from subscriber gains in the United States, positive movements in foreign exchange rates and solid growth within the Enterprise segment. DBRS notes that Cogeco’s Canadian cable and telephony subscriber bases have continued their trajectory of declines quarter over quarter, while subscriber growth among high-speed Internet subscribers has decelerated. Canadian television subscribers have been declining because of increasing Internet protocol television competition and cord cutting, while the Company’s telephony subscriber base has been negatively affected by continued residential declines and expiring promotions. Cogeco continues to focus on growing its underpenetrated U.S. operations and expanding its data services offerings to diversify and bolster growth prospects.

Operating margins remain relatively stable, resulting in EBITDA of $663 million for the nine months ended May 31, 2014. Increasing operating expenses related to the growth of Peer 1 and the TiVo launch in the United States were offset by a shift toward higher-margin Internet subscribers from lower-margin TV customers. In terms of financial profile, Cogeco has directed the majority of its free cash flow toward debt reduction over the past nine months. The Company’s LTM gross debt-to EBITDA has fallen to 3.2 times (x) currently from a high of 3.8x following the debt-financed acquisitions of Peer 1 in early 2013 and ABB in mid-2012.

Going forward, DBRS will continue to focus on the competitive landscape in Canada and the United States, Cogeco’s subscriber base and the operating performance of the Company’s managed hosting services and data centres. DBRS expects further subscriber erosion in Canada over the longer term, as Bell Canada is ultimately targeting a fibre build-out, which will cover approximately 70% of Cogeco’s territory up from approximately 29% currently. The Company will likely increase its focus on customer retention and work to grow its commercial market share to help mitigate residential subscriber declines in Canada. Revenues in F2015 are expected to rise to approximately $2.0 billion partly due to low double-digit growth in the Enterprise segment. Margins are expected to remain relatively stable, resulting in F2015 EBITDA of between $900 million and $925 million.

DBRS expects the Company’s financial profile to remain within a range consistent for the current rating category based on continued deleveraging and Cogeco’s growing free cash flow generating capacity. DBRS believes the Company’s priority will be to continue to deleverage to 3.0x gross debt-to-EBITDA by the end of F2015 (from 3.2x currently) through a combination of EBITDA growth and debt reduction.

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 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 methodology is 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.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.