DBRS Confirms Cogeco Communications Inc.’s Ratings, All Trends Stable

DBRS Limited (DBRS) has today confirmed Cogeco Communications Inc.’s (Cogeco or the Company) Issuer Rating at BB (high), Senior Secured Notes & Debentures rating at BBB (low) with a recovery rating of RR1 and Senior Unsecured Notes rating at BB with a recovery rating of RR5. All trends are Stable. The confirmations are supported by Cogeco’s continued efforts to diversify earnings and its improved credit metrics as a result of deleveraging efforts. The ratings continue to reflect the Company’s established footprint in existing markets and the growth potential of the U.S. cable segment, while reflecting intensifying competition, risks associated with technological and regulatory changes, the lack of wireless offerings and ongoing repositioning of the data services business.

Consolidated revenues rose by 6.5% to nearly $2.2 billion in F2016, supported by acquisitive growth in the U.S. cable business, favourable currency tailwinds and new product enhancements, which more than offset disappointing results at Cogeco Peer 1. EBITDA margins remained healthy at 45.2%. As such, EBITDA grew by 5.7% to $983 million in F2016. However, DBRS notes that the Company recorded a sizable non-cash, non-recurring impairment charge in its Cogeco Peer 1 business, reflecting diminished longer-term growth prospects than previously anticipated. Nevertheless, cash generation remained healthy, and the Company used free cash flow and cash on hand to repay maturing debt and amounts outstanding on its revolver. As such, credit metrics improved, with gross debt-to-EBITDA declining to 2.95 times (x) as at August 31, 2016 (versus 3.53x a year prior), and the EBITDA interest coverage ratio and cash flow-to-debt improved to 7.46x and 24.5%, respectively, in F2016 (compared with 7.06x and 22.8%, respectively, in F2015).

Going forward, DBRS expects Cogeco’s earnings profile to remain pressured by competitive forces in the core Canadian cable unit and restructuring efforts in the Cogeco Peer 1 business, although growth prospects in the U.S. cable segment should provide an offset. DBRS will continue to focus on subscriber erosion and the competitive landscape in Canada, as well as monitor developments in the enterprise segment and risks associated with any potential acquisitions. Revenues are forecast to climb to over $2.2 billion in F2017, reflecting rate increases, continued subscriber gains and improved penetration in the U.S. cable segment. EBITDA margins, however, are expected to continue to decline toward the high 44% range. As such, EBITDA should be between $990 million and $1.0 billion in F2017.

DBRS expects the Company’s financial profile to remain supportive of the current ratings over the near term because of steady free cash generation, in the absence of debt-financed acquisitions. Cash flow from operations is expected to grow to between $790 million and $810 million in F2017. The Company’s capital intensity ratio should decline to roughly 20%, with capital expenditures declining to $445 million. Cash dividend payments are expected to grow to $85 million. As such, normalized free cash flow before changes in working capital (and after dividend payments) should be in the $260 million to $280 million range in F2017. DBRS notes that management continues to explore potential tuck-in acquisitions within the fragmented U.S. cable market. In light of a challenging operating environment within the Canadian cable business and the ongoing repositioning of Cogeco Peer 1, DBRS believes that while future debt-financed acquisitions could be manageable within the current ratings; however, this will require gross debt-to-EBITDA to remain below 3.5x and the establishment of a credible deleveraging plan. Otherwise, DBRS expects the Company to continue deleveraging toward 2.5x over the near term through a combination of debt repayment and growth in operating income, which would strengthen the Company’s position within the current rating categories.

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 and DBRS Criteria: 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.