DBRS Morningstar Changes Corus's Trend to Stable from Negative and Confirms Issuer Rating at BB

DBRS Limited (DBRS Morningstar) changed the trend on Corus Entertainment Inc.’s (Corus or the Company) Issuer Rating to Stable from Negative and confirmed the rating at BB. The trend change reflects Corus’s stronger-than-expected operating results for F2020 and the first half of F2021 (H1 F2021) and DBRS Morningstar’s view that, while there are still uncertainties relating to the pace of the anticipated recovery in advertising revenue, the Company’s free cash flow (FCF) profile has stabilized and continues to be directed primarily to debt reduction. As a result, Corus is well placed to navigate the current operating environment within the BB rating category as the vaccine rollout is expected to enable a gradual return to a more normal economic environment. 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 advertising spending (ad spend) to digital and online channels from traditional media, partially offset by subscription revenue to digital channels, the persistent annual cord-cutting and/or shaving by Canadian households, and, to a lesser degree, the uncertainty associated with the Canadian Radio-television and Telecommunications Commission’s (CRTC) pending regulatory changes.

On June 9, 2020, DBRS Morningstar changed the trend on Corus’s Issuer Rating to Negative from Stable and confirmed the Issuer Rating at BB. The trend change reflected DBRS Morningstar’s concerns at that time that Corus’s near-term earnings would be negatively affected by the Coronavirus Disease (COVID-19) pandemic, and that the earnings profile would remain pressured in the near to medium-term due to a weaker macroeconomic environment. As such, DBRS Morningstar was concerned that the business risk profile and corresponding key credit metrics could deteriorate beyond the level considered appropriate for the current rating category for an extended period.

As expected, Corus’s revenue and EBITDA were pressured primarily by the contraction of advertising revenue as advertisers grappled with the impact of consumer behaviour uncertainties in response to the coronavirus pandemic. F2020 consolidated revenue declined 10.4% year over year (YOY) to $1,551 million as revenue performance hit a trough in Q3 F2020 (quarter ended May 30, 2020), reflecting severe advertising revenue weakness in both TV and radio before annual growth improvement began to take hold in Q4 F2020. The improving revenue growth trend continued through H1 F2021, with revenue of $779 million, down 7.7% YOY as TV ad spend continues to recover at a faster pace than radio. Amid the challenging topline operating environment, the F2020 EBITDA of $506 million was down 13.5% YOY as the Company effectively managed discretionary and programming costs and benefited from the Canada Emergency Wage Subsidy (CEWS) program. This resulted in a lower decline than DBRS Morningstar’s expectation of a high-teens annual decline for the period. EBITDA performance continued to improve in H1 F2021, to $291 million, down only 2.9% YOY reflecting a continued focus on streamlining operations amid a remote work environment, relief from CRTC fees, CEWS benefit, and an improving topline trend. F2020 EBITDA margin was 33.5% compared with 34.7% in F2019, and has continued on a sequential recovery through H1 F2021. H1 F2021 EBITDA margin was 37.4% compared to 35.6% in H1 F2020,benefitting from lower programming fees.

In terms of the Company’s financial profile, F2020 FCF after dividends and before changes in working capital decreased to $202 million from $242 million in F2019 (-16.3% YOY). This was primarily attributable to a lower level of depreciation in F2020, despite a significant decline in F2020 capital expenditures (capex) of $15 million compared to $30 million spent in the prior fiscal year. F2020 total dividend payments were essentially flat. The Company continued to prioritize debt reduction, paying down $245 million of term debt thus ending the year with $1.70 billion of debt. As a result, despite the challenging operating environment that pressured EBITDA, gross debt-to-EBITDA increased to 3.30 times (x) in F2020 compared to 3.11x in F2019 and performed better than expected. As operating performance improved in H1 F2021, the Company has continued to aggressively pay down debt. H1 F2021 debt declined by $103 million to $1.56 billion, resulting in last 12 months as of Q2 F2021 gross debt to EBITDA of 3.14x compared to 3.30x at YE F2020.

DBRS Morningstar believes that the ongoing impact of the coronavirus pandemic and related containment measures will ease with the rollout of vaccines across Canada and the anticipated movement towards a national reopening through the latter half of the year will support improving operating performance in the near to medium term. Additionally, while radio and local TV are expected to remain under pressure in the near term, Corus’s long term focus on content creation (Nelvana and Corus Studios), growing traction in its digital platforms (STACKTV and Nick+), positive momentum in content licensing sales and easy H2 F2021 advertising revenue comparables, are expected to result in an acceleration of topline and EBITDA growth in the second half of F2021. Consequently, DBRS Morningstar forecasts revenue to increase in the mid-single digits in the near term and that EBITDA margins will modestly decline in 2021 as programming costs move towards a more “normalized” level, but remain in the low 30s through our forecast horizon. As such, DBRS Morningstar forecasts EBITDA to be essentially flat YOY in F2021 and begin to increase in the low-to-mid single digit range through F2024.

The anticipated stabilization in operating income and aggressive allocation of cash flow to debt reduction should enable Corus to improve its key credit metrics in F2021 and strengthen the Company’s profile within the rating category. DBRS Morningstar forecasts FCF after dividends and before changes in working capital to be $170 to $175 million in F2021 reflecting the lower level of net income, an approximate 25% YOY increase in capex and modest increase in dividend payments. The Company is expected to continue to prioritize using internally generated cash flow towards debt reduction for the foreseeable future. DBRS Morningstar notes that the Company essentially achieved its previously stated net leverage target of <3.0x as of Q2 F2021 (3.02x net leverage as reported by the Company) and has further lowered its net leverage target to <2.5x. DBRS Morningstar expects F2021 gross leverage to be approximately 3.0x and for leverage to continue to improve over the next several years, reflecting a combination of EBITDA growth and continued debt reduction.

Should leverage move in a sustainable manner to the new leverage target level and the Company continue to diversify operating income towards its current and/or future digital platforms, content licensing deals and continue to grow its proprietary content offering/library (thus reducing the impact of volatility inherent in the advertising revenue market), a positive rating action may occur. Conversely, if as a result of weaker-than-expected operating performance and/or more aggressive financial management, the rating may be pressured.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Broadcasting Industry (March 12, 2021, https://www.dbrsmorningstar.com/research/375262), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262), 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 did have 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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