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

DBRS Limited (DBRS) confirmed the Issuer Rating of Corus Entertainment Inc. (Corus or the Company) at BB with a Stable trend. The rating confirmation follows the Company’s revised capital allocation policy and Q3 F2018 results released on June 27, 2018.

In the revised capital allocation policy, Corus will reduce its annual dividend to $0.24 per Class B Share and $0.235 per Class A Share (compared with the current annual payment of $1.14 and $1.135, respectively) effective September 1, 2018, with a long-term goal of maintaining a dividend yield in excess of 2.5%. Beginning in December 2018, dividends will be paid on a quarterly basis, rather than a monthly basis, subject to approval by the Board of Directors in October 2018. As permitted under Corus’s Dividend Reinvestment Plan (the Plan), in lieu of issuing new shares, Corus will satisfy its share delivery obligation under the Plan by purchasing Class B Shares on the open market. In addition, Corus will move to a 0% discount (versus a 2% discount previously) for shares delivered under the Plan.

Corus also released Q3 F2018 results for the period ended May 31, 2018, that continue to reflect the challenging advertising environment that the Company faces, particularly in television, which pressured top-line and profitability results. In addition, Corus recognized a non-cash impairment charge of $1.0 billion related to broadcast licences and goodwill.

In the last rating action (May 19, 2017), DBRS indicated that pressure on the earnings profile could affect free cash flow, which could make Corus’s deleveraging target of 3.0 times (x) by the end of F2018 difficult to achieve (particularly considering the Company’s onerous dividend distribution). That said, DBRS indicated that Corus’s leverage target of 3.0x by the end of F2018 would be more than adequate to maintain the current rating; however, 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) if financial leverage remained above 3.5x.

Since the last rating action, Corus’s revenue results have underperformed DBRS’s forecast. Conversely, effective cost controls and streamlining of the business have resulted in profitability that has been more closely aligned with expectations, although DBRS views the quality and sustainability of earnings achieved through internal cost initiatives as lesser quality than earnings achieved through top-line growth. Revenue through the first nine months (year to date (YTD)) of F2018 were $1,268 million, down 2.3% YOY, and YTD EBITDA was $461 million, down 2.0% YOY. This level of profitability, combined with debt repayment and a capital intensity of about 1.5%, has enabled financial metrics to remain acceptable for the current rating category, despite the Company’s onerous historical dividend payout. Balance sheet debt as of the end of Q3 F2018 was $2.0 billion compared with $2.1 billion as at F2017 year end.

Looking ahead, DBRS expects operating results to remain under pressure as the Company navigates a challenging traditional advertising environment. As such, F2019 EBITDA is expected to range between $550 million and $575 million. Corus’s revised capital allocation policy is a material capital conservation measure that should help preserve the Company’s credit risk profile within the current rating category over the near term and allows the Company to reset its dividend policy to be more aligned with the operating environment. DBRS estimates that the revised capital allocation policy should reduce the Company’s annual dividend payment to roughly $50 million, down from $230 million, of which an estimated $150 million is expected to be cash savings. As a result, F2019 free cash flow (after dividends but before working capital) is expected to be about $300 million.

Reducing leverage toward 3.0x net debt-to-segment profit (versus 3.38x as of Q3 F2018) is a top priority for Corus management. While deleveraging through EBITDA growth rather than debt repayment is generally considered higher quality, DBRS notes that under the new capital allocation policy, the revised free cash flow profile provides the Company with the ability to meaningfully reduce debt and manage its financial leverage to its stated target over the near to medium term. There may even be additional capital available for new investment and/or acquisition(s) that could enhance the Company’s long-term growth outlook. That said, the inability to stabilize operating profitability over the mid- to long term and/or non-accretive investments could result in a negative rating action despite the revised capital allocation policy introduced on June 27th.

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

The principal methodology is Rating Companies in the Broadcasting 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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