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

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 confirmation follows the announcement that the Company has reached an agreement to sell Cogeco Peer 1 Inc. (Peer 1), its business information and communications services technology business, to affiliates of Digital Colony, a global investment firm that is an owner and operator of digital infrastructure and real estate management businesses. The transaction is valued at $720 million and is expected to close during the third fiscal quarter of 2019 (period ending May 31, 2019).

Cogeco plans to use a portion of the net proceeds to repay the $548 million outstanding under the Company’s term revolving credit facility (Q1 F2019 ending November 30, 2018). The Company may also direct a portion of the net proceeds to the repurchase of its subordinated voting shares under a normal course issuer bid (NCIB), which is to be implemented after the closing of the transaction and subject to the approval of the Toronto Stock Exchange. Under the proposed NCIB Cogeco intends to seek approval to repurchase for cancellation up to 10% (approximately 1.86 million shares currently valued at approximately $153 million) of the “public float” of the Company’s issued and outstanding subordinated voting shares over a 12-month period.

Cogeco acquired Peer 1 in a $666 million transaction in January 2013; it now represents the vast majority of Cogeco’s Business ICT Services segment. The segment reported fiscal 2018 revenue and EBITDA of $280 million and $84 million, respectively, and represented approximately 8% of consolidated fiscal 2018 EBITDA.

Given the challenging operating environment in the data services industry and relatively modest EBITDA contribution, the sale of Peer 1 does not have a material impact on DBRS’s business risk outlook for Cogeco. Conversely, DBRS expects the divestiture to enable the Company to increase its focus and resources on its core Canadian and American communications businesses. The transaction should also provide the Company with a greater amount of financial flexibility to pursue attractive return opportunities, particularly in its fast-growing U.S. business.

DBRS notes that Cogeco’s gross leverage has been elevated since the $1.72 billion MetroCast acquisition, which was completed in January 2018. In DBRS’s most recent rating report, dated January 9, 2019, DBRS indicated that Cogeco has the ability and willingness to deleverage its balance sheet towards 3.0 times (x) over the next year and a half, based on earnings growth and the application of free cash flow towards debt reduction. The Peer 1 divestiture improves Cogeco’s financial risk profile and hastens the Company’s pace of deleveraging. Post-transaction leverage is expected to improve with pro forma total debt to EBITDA declining to 3.30x to 3.40x compared with 3.61x as of Q1 F2019 ended November 30, 2018 (3.63x at F2018 ended August 31, 2018) and may enable the Company to reach its leverage target at the shorter end of its timeframe.

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

The principal methodologies are Rating Companies in the Communications Industry and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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