DBRS Confirms Corus Entertainment Inc.’s Issuer Rating of BB with Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Corus Entertainment Inc. (Corus or the Company) at BB with a Stable trend. The rating confirmation acknowledges somewhat greater pressure on revenue than anticipated at the time of the Shaw Media Inc. (Shaw Media) acquisition but is supported by cost synergies and the modest debt reduction that have been achieved to date. The BB rating continues to reflect Corus’s strengthened market position in its TV business, strong cash-generating capacity and continued commitment to deleveraging. The rating also continues to consider the structural shift in ad spend from traditional media to digital and online channels, the persistent annual cord cutting and/or shaving by Canadian households and, to a lesser degree, the seemingly moderating uncertainty associated with the recently enacted Canadian Radio-television and Telecommunications Commission cable regulations.

Since the closing of the Shaw Media acquisition on April 1, 2016, DBRS notes that there has been more pressure on Corus’s earnings profile than had been anticipated. Last 12 months (LTM) ended February 28, 2017, revenue of $1,582 million has trended below initial pro forma expectations because of more intensive competition for advertising revenue than foreseen. However, LTM EBITDA margin performance, which is in the mid-30s, has been in line with DBRS’s expectations, largely because of cost synergies realized post-acquisition. While DBRS will continue to closely monitor revenue trends, profitability has been adequate for the current rating category.

In terms of the financial profile, the Company’s EBITDA, cash flow and modest debt reduction have evolved largely as expected since the Shaw Media acquisition.

Going forward, DBRS expects the Company to prioritize its significantly enhanced cross-platform advertising capabilities and to leverage advertising technology to enhance its sales strategy in an attempt to support top-line performance, which, when combined with an EBITDA margin of 33% to 35%, suggests an annualized EBITDA run rate of about $600 million. As a result, DBRS expects Corus’s earnings profile to remain supportive of the current rating over the near term. However, the Canadian media sector is experiencing significant structural challenges, including competition driven by digital disruption as advertisers continue to pursue exposure to interactive platforms, including on the web and through mobile and over-the-top services, which could have a negative impact on Corus’s earnings profile over the medium to longer term.

Longer-term pressure on the earnings profile could affect free cash flow, which could make the Company’s deleveraging target difficult to achieve in its intended time frame (particularly in light of the Company’s onerous dividend distribution). That said, Corus’s leverage target of 3.0 times (x) by the end of F2018 is more than adequate to maintain the current rating. DBRS would consider a negative rating action over the near to medium term if there was a material decline in revenue, operating income and free cash flow (after dividends) while financial leverage remains above 3.5x.

DBRS has also discontinued the rating on Corus’s Senior Unsecured Notes, which were rated BB with a Stable trend with a Recovery Rating of RR4, as the notes were redeemed by the Company on April 18, 2016.

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 principal methodologies are Rating Companies in the Television Broadcasting Industry and Rating Companies in the Radio Broadcasting Industry, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.