DBRS Confirms Corus Entertainment Inc. at BB, 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 acknowledges greater-than-expected pressure on television (TV) advertising revenue, but credits the Company’s ability to continue to streamline operations and delever its balance sheet. 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 advertising spending to digital and online channels from traditional media, 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.

Declining TV advertising revenue trended below DBRS’s expectations, which pressured consolidated top-line revenue, despite a relatively stable subscriber revenue trend and the Company’s focus on increasing content revenue. Notwithstanding top-line pressure, EBITDA margin increased modestly year over year as Corus successfully identified cost savings and streamlined its business.

Despite softer-than-expected operating performance, the Company’s financial profile continues to evolve largely in line with expectations, primarily as a result of modest but continued debt reduction, and is supportive of the current rating.

Corus is expected to further integrate and streamline its cross-platform advertising capabilities. Content-delivery channels, such as Twitter and video-on-demand platforms, should further bolster the Company’s sales offering over the medium to longer term; however, DBRS expects that it will take time for Corus to realize the full revenue potential of these initiatives. As a result, DBRS has become more conservative in its revenue forecast versus prior expectations. That said, the Company has proven adept at driving increased operating efficiencies and is expected to continue doing so as it integrates operating segments and further streamlines business processes. As such, DBRS expects an EBITDA margin of 32% to 34% through its forecast horizon.

In June 2018, Corus revised its capital-allocation policy which cut its expected annual dividend by about 80%. The policy significantly clarifies Corus’ future capital-allocation intentions and provides the means, not just the willingness, by which the Company can reduce leverage. While DBRS anticipates continued pressure on Corus’s earnings profile, which may negatively affect free cash flow (FCF), the Company’s leveraging target of 3.0 times (x) net debt-to-EBITDA over the next 12 to 24 months is more than adequate to maintain the current BB rating. Barring a material decline in Corus’s revenue, operating income and FCF (after dividends) while financial leverage remains above 3.5x, DBRS does not expect negative rating action over the near to medium term.

Notes:
The principal methodology is Rating Companies in Broadcast 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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.