DBRS Confirms Cogeco Communications Inc.’s Issuer Rating at BB (high), Stable Trend

DBRS Limited (DBRS) confirmed Cogeco Communications Inc.’s (Cogeco or the Company) Issuer Rating at BB (high) and its Senior Secured Notes & Debentures rating at BBB (low) with a recovery rating of RR1. All trends are Stable. The Senior Unsecured Notes were repaid by the Company and have been discontinued. The confirmations are supported by Cogeco’s continued efforts to strengthen its 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 or ABB), 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 F2018 remained stable as consolidated revenue and earnings increased primarily as a result of acquisition activity in the U.S. broadband segment, partially offset by slightly weaker than expected results in the core Canadian broadband business and continued softness in the Business ICT Services segment.

As expected, post the January 4, 2018 (Q2 F2018), MetroCast acquisition, Cogeco’s lease-adjusted gross debt-to-reported EBITDA increased materially and ended the fiscal year at 3.63 times (x). While leverage at year end is above the level that is normally appropriate for the current rating, DBRS expects the Company to continue to delever towards 3.0x through F2019, a level that is sufficient to maintain the current rating.

DBRS expects Cogeco’s earnings profile to be stable to slightly positive in the near to medium term, as the benefits to the business risk profile afforded by ABB and the MetroCast acquisition are expected to more than offset continued challenges in the Canadian businesses. DBRS forecasts consolidated revenue of $2.55 billion to $2.60 billion in F2019 and mid- to low-single-digit growth in the F2020 to F2022 timeframe, primarily reflecting the MetroCast acquisition and positive operating trends at ABB. The F2019 EBITDA margins are expected to remain in the high 44% range, reflecting an increased contribution from lower-margin ABB, offset by a recovery in margin performance at Cogeco Connexion. As such, EBITDA is expected to rise to $1.1 billion to $1.2 billion in F2019 and then grow in the mid-to low-single-digit range through F2022.

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 lease-adjusted gross debt-to-reported 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 & Criteria.

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.

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