DBRS Morningstar Confirms Cogeco Communications Inc.’s Ratings

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 reflect Cogeco's solid operating performance and integration of the Ohio Broadband systems acquisition that closed on September 1, 2021, which resulted in earnings and leverage at year-end F2022 in line with DBRS Morningstar's expectations. The Stable trends consider the opportunity to launch a capital-light wireless service in the Canadian marketplace and continued earnings growth in both the Canadian and U.S. markets. The ratings consider the Company’s established footprint in existing markets, the growth potential of the U.S. broadband segment (Breezeline, formerly named Atlantic Broadband or ABB), and Cogeco's potential entry into the Canadian mobile market, while reflecting intensifying competition, risks associated with technological and regulatory changes, and the resources required to develop a successful wireless offering.

Cogeco’s F2022 earnings were driven by solid organic EBITDA growth at both Cogeco Connexion and the U.S.-based Breezeline business, in addition to acquisition-driven growth at Breezeline, which, on a consolidated basis, slightly exceeded DBRS Morningstar's expectation, resulting in a consistent earnings profile in F2022. Cogeco's financial profile was stable, as credit metrics were either in line or slightly better than expected and continue to support the rating.

Over the long term, Cogeco's earnings profile has the potential to improve if the Company is able to successfully enter the Canadian mobile market under the Canadian Radio-television and Telecommunications Commission's hybrid-mobile virtual network operator wireless industry framework. Cogeco has already invested a material amount in 5G-ready spectrum and indicated that it is developing plans to launch a capital-light mobile service within its service footprint. However, DBRS Morningstar does not expect Cogeco to launch a wireless product until F2024.

On a consolidated basis, DBRS Morningstar forecasts F2023 revenue to increase in the low single digits, with growth in both the Canadian and U.S. markets. DBRS Morningstar expects F2023 EBITDA margins to come under modest pressure in the mid-term and then steadily return to F2021/F2022 levels by F2026.

DBRS Morningstar expects Cogeco’s financial profile to remain supportive of the current ratings, which anticipate continued network spending in both the Canadian and U.S. markets and investment in mobile wireless spectrum licences by Cogeco Connexion. Cogeco’s consolidated leverage is expected to decline slowly through DBRS Morningstar’s forecast horizon, reflecting earnings growth rather than debt reduction (or a combination), continued network expansion, participation in upcoming mobile spectrum licence auctions, the launch of a mobile offering, and returning capital to shareholders.

Should wireline operating metrics deteriorate materially, wireless not gain sufficient traction in the marketplace, and/or leverage move structurally higher toward 3.5 times (x) to 4.0x, DBRS Morningstar may take a negative rating action on Cogeco’s Issuer Rating. Conversely, if operating performance reflects the successful expansion of Cogeco's service offering and the Company is able to deleverage in a manner that sustains core or non-acquisition-driven leverage below 3.0x, DBRS Morningstar may take a positive rating action on Cogeco’s Issuer Rating.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodologies are Rating Companies in the Communications Industry (July 21, 2022; https://www.dbrsmorningstar.com/research/400203), DBRS Morningstar Global Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (September 1, 2022; https://www.dbrsmorningstar.com/research/402218), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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.

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

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].

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

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