DBRS Morningstar Changes Trend on Corus Entertainment Inc. to Negative, Confirms Issuer Rating at BB

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Corus Entertainment Inc. (Corus or the Company) at BB and changed the trend on the rating to Negative from Stable. The trend change reflects DBRS Morningstar’s concerns that Corus’s near-term earnings will be negatively affected by the Coronavirus Disease (COVID-19) pandemic, and that the earnings profile will remain pressured in the near to medium term due to a weaker macroeconomic environment. As such, DBRS Morningstar is concerned that the business risk profile and corresponding key credit metrics could deteriorate beyond the level considered appropriate for the current rating category.

On August 19, 2019, DBRS Morningstar confirmed Corus’s Issuer Rating at BB with a Stable trend. The rating confirmation reflected both the intensifying competitive pressures in the industry and the better-than-expected television (TV) advertising revenue performance and balance sheet deleveraging year-to-date Q3 F2019. At that time, DBRS Morningstar forecast F2020 EBITDA to be down modestly year over year as a result of higher programming costs and spending on Canadian content. Leverage was expected to continue to improve towards 3.0 times (x) by the end of F2020. DBRS Morningstar’s outlook on Corus’s earnings has since weakened as a result of the coronavirus pandemic and its related macroeconomic effects.

In F2020, despite the jump in viewership stemming from coronavirus restrictions, Corus’s topline will be pressured by the contraction in demand for advertising as numerous industries, including travel, entertainment, automotive, and airline, materially curtailed advertising activity. The decline in advertising revenue is expected to more than offset a modest increase in subscription revenue. DBRS Morningstar expects the decline in advertising spending (ad spend) to have an adverse knock-on effect on operating income and EBITDA margins, despite the expectation of lower programming cost and cost-cutting initiatives that the Company implemented in response to the crisis. DBRS Morningstar believes that the pressure on earnings are likely to persist into F2021 due to a weaker macroeconomic environment.

The decline in operating income and corresponding cash flow is expected to weaken Corus’s financial profile and key credit metrics. Having said that, DBRS Morningstar expects Corus to generate enough free cash flow in the near future that it may continue to reduce debt in H2 F2020 while maintaining its current dividend commitment. However, should operating performance remain suppressed and/or leverage move structurally towards the 4.0x level through the course of F2021, a negative rating action could result.

While the Company could use capital conserving measures to defend credit metrics, the revision of the trend to Stable would be more influenced by stabilization and recovery in operating income rather than debt reduction.

Corus’s rating reflects the Company’s stable 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 ad spend 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 uncertainty associated with potential Canadian Radio-television and Telecommunications Commission regulatory changes

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Broadcasting Industry (March 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships (November 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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