DBRS Morningstar Confirms Its Rating of Cogeco at BB (high) with a Stable Trend

DBRS Limited (DBRS Morningstar) 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 confirmations are supported by Cogeco’s effective deleveraging following the MetroCast acquisition in January 2018 and stable operating results. The ratings consider 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, and the lack of a wireless offering.

Cogeco’s earnings profile through F2019 remained stable as consolidated revenue and earnings continued to perform in line with expectations, reflecting solid revenue and EBITDA growth at ABB and modest EBITDA growth in the Canadian broadband business. The Company divested its capital-intensive data services business, Cogeco Peer 1, on April 30 2019, and further streamlined internal operations, which should support future growth.

As expected, Cogeco continued to reduce leverage following the Q2 F2018 MetroCast acquisition ending F2019 at a lease-adjusted gross debt-to-EBITDA of 3.13 times (x), a level that is sufficient to maintain the current rating and well down from 3.63x in F2018. Year-end F2019 cash was $557 million.

DBRS Morningstar expects Cogeco’s earnings profile to be stable in the near to medium term, reflecting the benefits of continued strong results at ABB, an increase in the proportion of revenue derived from the U.S. (geographic and service diversification) and a management team that is now exclusively focused on its broadband businesses following the Cogeco Peer 1 divestiture. DBRS Morningstar forecasts consolidated revenue of approximately $2.4 billion in F2020 and low- to mid-single-digit growth through F2023, primarily reflecting the positive earnings impact of the MetroCast acquisition and strong ABB growth prospects. F2020 EBITDA margins are expected to remain in the 47% to 48% range, reflecting improved margin performance at ABB. As such, EBITDA is expected to rise to $1.1 billion to $1.2 billion in F2020 and then grow in the low- to mid-single-digit range through F2023.

Cogeco’s financial profile is expected to remain supportive of the current rating as the Company has successfully deleveraged following the MetroCast acquisition. DBRS Morningstar notes that, over the last 10 years, Cogeco has an impressive track record of using debt to either fund or partially fund acquisition activity and then effectively reduce leverage within an 18- to 24-month period after close. While Cogeco may continue to use free cash flow to delever its balance sheet over the near to medium term toward—and possibly below—3.0x, DBRS Morningstar believes that it is highly likely that the Company will pursue debt-financed growth opportunities, including company and/or asset acquisitions in the future.

Looking ahead, if operating metrics were to deteriorate materially and/or leverage move structurally higher, a negative Issuer Rating action may result. Conversely, while DBRS Morningstar considers it unlikely, if lease-adjusted gross debt to EBITDA were to trend meaningfully and sustainably below 3.0x, and/or operating performance were to consistently outpace expectations, a positive Issuer Rating action may occur.

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

The principal methodologies are Rating Companies in the Communications Industry, DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, DBRS Criteria: Recovery Rating for Non-Investment Grade Corporate Issuers and DBRS Criteria: Guarantees and Other Forms of Support, 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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 Morningstar 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 [email protected].

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