DBRS Downgrades the Issuer Rating of Corus Entertainment Inc. to BB (high)

DBRS Limited (DBRS) has today downgraded Corus Entertainment Inc.’s (Corus or the Company) Issuer Rating to BB (high) from BBB (low). DBRS has assigned a recovery rating of RR4 to the Company’s Senior Unsecured Notes & Debentures, corresponding to a rating of BB (high), based on the criteria “DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers.” The trends are all Stable. The rating action reflects mounting pressure on the Company’s earnings profile as a result of a number of structural trends and the added uncertainty associated with the recently announced CRTC rulings. DBRS believes these factors will contribute to less predictable and potentially lower organic earnings over the near to medium term.

In its rating report dated February 27, 2014, DBRS stated that it believed EBITDA would rise to between $300 million and $320 million by the end of F2014, supported by approximately $100 million of incremental revenues from the acquisition of television assets from Bell Media Inc. and Shaw Media Inc., meaningful cost synergies achieved over the short term and flat organic ad revenue growth in Corus’ television segment.

Corus’ actual F2014 consolidated EBITDA rose to $290 million from $251 million in F2013, primarily as a result of acquisitions. However, DBRS notes that organic operating profit declined materially because of further weakening in Radio and TV advertising markets, and declining radio ratings in several key markets. Through H1 F2015, consolidated revenue and EBITDA remained relatively flat year over year, as advertising and rating challenges persisted, particularly in the radio segment. Corus booked a $130 million impairment charge to account for these challenges with the release of Q2 F2015 results. In addition, the Company indicated that it would now not be able to achieve the low end of its most recent F2015 EBITDA guidance ($300 million to $320 million), which had already been revised downward at the end of F2014 (from $340 million to $360 million).

Corus’ lower operating profit outlook in F2015 may suggest that the deterioration in earnings could contain an element of structural downtrend in advertising revenues, rather than a purely cyclical downtrend caused by economic factors as initially expected. DBRS notes that the challenging operating environment may be further exacerbated by the new unbundling rules announced by the CRTC, which are expected to be instituted in late 2016. DBRS believes this ruling increases the risk to operating results going forward, as Corus is significantly exposed to television broadcasting (nearly 80% of total revenues), and cord shaving/over-the-top services substitution could lead to further earnings deterioration if Corus fails to maintain viewership levels within its key broadcasting networks. That said, Corus continues to focus on enhancing its program offering in order to benefit viewership levels, with the Nickelodeon and Disney transactions being two of the most recent examples of such.

In its last rating report, DBRS expected the combination of growth in operating income growth and steady debt repayment ($100 million of free cash flow toward debt repayment in both F2014 and F2015) to result in debt-to-EBITDA between 2.0 times (x) and 2.3x by the end of F2015. DBRS now forecasts that credit metrics will weaken to a level that will no longer be appropriate for the previous rating category, primarily as a result of lower expected EBITDA earnings. Gross debt-to-EBITDA is expected to be in the range of 3.0x to 3.5x at the end of F2015.

The Stable trends reflect DBRS’s view that Corus should retain a reasonably significant baseline level of earnings going forward based on its established Canadian market positions in television and radio broadcasting. The trends also reflect the view that the Company will continue to generate free cash flow that will be used for debt reduction to support its credit metrics inside the revised rating category. While DBRS believes that Corus has adequate capacity in the new rating category to execute its business strategy with potential to strengthen its financial profile in the near to medium term, greater-than-expected earnings deterioration from an increasingly competitive environment or regulatory change could cause additional pressure on the rating.

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

The applicable methodologies are Rating Companies in the Television Broadcasting Industry, Rating Companies in the Radio Broadcasting Industry and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.

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

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