DBRS Confirms Cogeco Communications Inc.’s Issuer Rating, Trends Stable

DBRS Limited (DBRS) confirmed Cogeco Communications 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 are Stable. The confirmations are supported by Cogeco’s continued efforts to strengthen and diversify the Company’s long-term earnings profile and its commitment to improved credit metrics through deleveraging efforts. The ratings continue to reflect the Company’s established footprint in existing markets and the growth potential of the U.S. broadband segment (Atlantic Broadband), including the impact of the USD 1.4 billion MetroCast acquisition, while reflecting intensifying competition, risks associated with technological and regulatory changes, the lack of wireless offerings and ongoing repositioning of the data services business.

Cogeco’s earnings profile through F2017 and through H1 F2018 remained stable, as revenue and earnings increased primarily as a result of low-single-digit growth in the Canadian broadband business and mid-single-digit growth at Atlantic Broadband, which offset weakness in the Business ICT Services segment.

Cogeco continued to deleverage through F2017 and up until the January 2018 MetroCast acquisition, as per expectations, which strengthened the Company’s financial profile within the rating category during this period. The largely debt-financed MetroCast acquisition increased leverage in the Q2 F2018 period ending February 28. While this level of leverage is above the range normally appropriate for the current rating, Cogeco’s credible deleveraging plan toward 3.0 times (x) over the next 18 months is sufficient to maintain the current rating.

DBRS expects Cogeco’s earnings profile to strengthen moderately in the near to medium term, as the benefits to the business risk profile afforded by Atlantic Broadband and the MetroCast acquisition more than offset continued challenges in the Canadian broadband and enterprise segments. DBRS forecasts consolidated revenue of $2.50 billion to $2.55 billion in F2018 and mid- to high-single-digit growth in F2019 as both periods benefit from the MetroCast acquisition. F2018 EBITDA margins are expected to remain in the high 44% range, owing primarily to an increased contribution from the lower-margin U.S. broadband segment and escalating program and content costs, partly offset by operational efficiency initiatives. As such, EBITDA is expected to rise to $1.1 billion to $1.2 billion in F2018 and grow in the mid-single-digit range in F2019.

Cogeco’s financial profile is expected to remain supportive of the current rating as the Company executes its deleveraging plan post the MetroCast acquisition. Cogeco has completed four material acquisitions over the last ten years and has a history of effective leverage reduction after each of these transactions. DBRS believes that Cogeco has the ability and willingness to deleverage its balance sheet toward 3.0x over the next year and a half based on earnings growth and the application of free cash flow toward debt reduction. Should the Company’s gross debt-to-EBITDA not trend toward 3.0x over this period, a negative rating action could occur.

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

The principal methodology is Rating Companies in the Communications Industry, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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