Morningstar DBRS Downgrades Corus Entertainment Inc. to B (low) from B and Maintains Credit Ratings Under Review With Negative Implications

DBRS Limited (Morningstar DBRS) downgraded (1) the Issuer Rating of Corus Entertainment Inc. (Corus or the Company) to B (low) from B, (2) the credit rating on its Senior Unsecured Notes to CCC (high) from B, and (3) the recovery rating on the Senior Unsecured Notes to RR5 from RR4. At the same time, Morningstar DBRS maintained the Company's credit ratings Under Review With Negative Implications where they were placed on July 19, 2024.

KEY CREDIT RATING CONSIDERATIONS
The Issuer Rating downgrade reflects Morningstar DBRS' concerns about the Company's liquidity position because of the higher seasonal working capital required to secure programming for the upcoming season and the continued pressure on operating results, reflecting secular headwinds. On September 3, 2024, Corus announced an amendment with two key features to its secured credit facility: (1) the extension of the 4.75 times (x) debt-to-cash flow covenant to October 15, 2024 (compared with the step-down to 4.25x on September 1, 2024), and (2) continued access to the revolving credit facility during this period. Morningstar DBRS maintained the credit ratings Under Review With Negative Implications pending the final outcome of the secured credit facility negotiations and considering the uncertain financial impact of the anticipated re-branding and 2025 launch of two specialty channels.

The Under Review With Negative Implications status reflects the material uncertainty related to (1) Corus' ability to remain in compliance with the leverage covenants of its amended credit facility agreement through October 15, 2024, (2) the Company's ability to negotiate a more permanent (i.e., for at least 12 months) secured credit agreement, and (3) the ongoing possibility of a debt-restructuring event in the near term (i.e., over the next 12 months).

The downgrade of the credit rating on the Senior Unsecured Notes to CCC (high) from B reflects two factors: (1) the downgrade of Corus' Issuer Rating to B (low) from B, and (2) the downgrade of the Recovery Rating on the Senior Unsecured Notes to RR5 (anticipated instrument recovery of 10% to 30%) from RR4 (anticipated instrument recovery of 30% to 60%). The lower Recovery Rating reflects the assumption that the secured debt made available under the amended revolving credit facility would be fully drawn in the event of a default scenario, thereby lowering the recovery rating of the Senior Unsecured Notes below 30%.

As of Q3 F2024 (ended May 31, 2024), Corus had $67 million in cash available on its balance sheet and approximately $30 million available under the secured credit facility. While quarterly cash flow is difficult to forecast, Morningstar DBRS conservatively assumes that Q4 F2024 cash flow will be modestly negative, reflecting continued weakness in operating results and incremental payments related to cost-cutting initiatives. Morningstar DBRS also estimates that approximately $30 million is available through the secured revolving credit facility to mid-October. Morningstar DBRS believes this relatively modest level of liquidity may impinge on the Company's ability to invest in new programming in the seasonally heavy first fiscal quarter of 2025. In addition, the loss of several Warner Bros. Discovery, Inc. specialty channel brands, including HGTV and the Food Network, is expected to create additional uncertainty around Corus' programming supply. Morningstar DBRS believes securing new lifestyle content to add to the existing Canadian content may place added pressure on Q1 F2025 cash flow as these re-banded channels are expected to launch on January 1, 2025.

While the operating environment is expected to remain challenging, Corus has been actively working to mitigate revenue declines with internal cost-control efforts. The Company is expected to reduce headcount by 800 as of the end of F2024, representing a 25% decline in its workforce from 2023, and has launched a broader effort to identify cost efficiencies throughout the organization. Additionally, as a result of station rationalization, the Company is looking to sell surplus real estate in several urban centres across Canada, however, the closing dates and ultimate values of these transactions are uncertain and likely counted in months not weeks.

CREDIT RATING DRIVERS
The Under Review with Negative Implications status reflects the near-term uncertainty about Corus' ability to remain in compliance with the leverage covenants of its amended credit facility agreement amid the expectation that operating results will continue to weaken in the foreseeable future. It also acknowledges the short timeframe that the Corus has to negotiate a more permanent credit facility agreement or pursue an alternative solution, given the Company's relatively weak negotiating position. As a result, a negative rating action will likely occur if the Company is unsuccessful in the negotiation of a more permanent amendment to its secured credit facility agreement or in the event of a debt restructuring.

Conversely, the credit ratings may be removed from Under Review with Negative Implications if the Company is able to successfully negotiate an amendment to the credit facility agreement that is accepted by all stakeholders and enables Corus to remain in compliance with all applicable covenants.

EARNINGS OUTLOOK
Morningstar DBRS' earnings outlook is essentially unchanged since its last rating action on July 19, 2024. Morningstar DBRS expects a decrease of about 13% to 15% in F2024 revenue, followed by a further decrease in the low 20% range in F2025 revenue, despite the easy annual comparable. Reflecting the lower revenue outlook while acknowledging the cost-cutting initiatives currently underway and the possibility of additional cost-cutting measures, Morningstar DBRS expects a decline in F2024 EBITDA in the high teen-to-20% range and a similar magnitude decline in F2025 EBITDA, which includes expected revenue losses related to the re-branding of home and food lifestyle channels.

FINANCIAL OUTLOOK
Looking at the financial profile, Morningstar DBRS estimates F2024 free cash flow (after dividends and before changes in working capital) will be between $40 million to $50 million, but expects the net change in cash will be modestly negative in F2024 compared with roughly breakeven in F2023. Further, despite a modest year-over-year reduction in debt and reflecting a material decline in EBITDA, gross leverage is expected to be more than 4.25x at YE2024 and more than 5.0x at YE2025.

CREDIT RATING RATIONALE
Corus' credit rating ratings are supported by its ability to create unique Canadian shows, its broad programming appeal across multiple formats, and its growing streaming portfolio. The credit ratings also acknowledge the structural shift in advertising spend to digital channels from traditional media, persistent cord cutting, and the increasing selection of media and entertainment options for consumers.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (August 13, 2024) at
https://dbrs.morningstar.com/research/437781

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Corus, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Corus, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Corus, the BRA and the FRA carry approximately equal weight.

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

Morningstar DBRS applied the following principal methodology:
--Global Methodology for Rating Companies in the Broadcasting Industry (April 15, 2024), https://dbrs.morningstar.com/research/431165

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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