Morningstar DBRS Confirms Cogeco Communications Inc. Issuer Rating at BB (high) With a Stable Trend

DBRS Limited (Morningstar DBRS) confirmed Cogeco Communications Inc.'s (Cogeco or the Company) Issuer Rating of BB (high), Senior Secured Notes & Debentures credit rating of BBB (low) with a recovery rating of RR1, and Senior Unsecured Notes credit rating of BB (high) with a recovery rating of RR4. All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect Cogeco's stable operating performance over the last 12 months, in which EBITDA growth was modestly higher than expected and cash flow was materially stronger than anticipated. The confirmations also acknowledge the highly competitive U.S. market where the Company posted a net loss in subscriptions and continued debt-funded share repurchase activity that occurred earlier in the year. The Stable trends reflect Morningstar DBRS' forecast of flat earnings year over year as the Company continues to pursue its long-term, capital light mobile service offering in both the United States and Canada, while establishing an integrated operating platform in order to drive long-term growth and cross border synergies.

CREDIT RATING DRIVERS
Morningstar DBRS could take a positive credit rating action should Cogeco successfully expand its service offering and is able to deleverage in a manner that sustains core or non-acquisition-driven leverage below 3.0 times (x). Morningstar DBRS could take a negative credit rating action should wireline operating metrics deteriorate materially, the wireless service does not gain sufficient traction in the marketplace, and/or leverage moves structurally higher toward the 3.5x to 4.0x range.

EARNINGS OUTLOOK
In F2025, Morningstar DBRS expects Cogeco to expand its mobile offering as a mobile virtual network operator (MVNO) in the United States, where it is offering flexible wireless plans across the majority of its wireline footprint. In Canada, Cogeco has signed a five-year mobile virtual network operator agreement with a national incumbent and with Eastlink, and Morningstar DBRS anticipates the Company to launch a mobile offering in the Canadian market by the end of the year. Underlining the nascent growth in a mobile service offering, Cogeco is expected to continue to increase its subsidized fibre-to-the-home footprint expansion plans in both Canada and the U.S., which has represented a roughly 9% organic growth (i.e., 253,000 units) since F2022.

Morningstar DBRS forecasts F2025 revenue to be essentially flat with a modest decline at Breezeline offset by growth at Cogeco Connexion. In F2026, Morningstar DBRS forecasts revenue growth to be modestly positive with growth in both the Canadian and U.S. markets primarily reflecting wireline rate increases, growth in the service footprint, and a mobile offering in both markets. Morningstar DBRS forecasts F2025 EBITDA to be essentially flat, as growth related to rate increases and internal operating efficiencies is expected to be offset by continued investment in the rollout of the mobile offering in Canada and the U.S. and invest in the cross-border transformation, before returning to modest growth in F2026.

FINANCIAL OUTLOOK
Morningstar DBRS forecasts Cogeco's financial profile to remain supportive of the current ratings. This view contemplates continued investment in Canada to support the launch and rollout of a mobile service, continued organic growth in both the U.S. and Canadian operating footprint, and the return of capital to shareholders primarily through dividends. We anticipate Morningstar DBRS free cash flow (i.e., after dividends, but before working capital changes) to range in the $250 million to $300 million range in F2025 and F2026. Cogeco's gross leverage is expected to decline modestly year over year in both F2025 and F2026, primarily reflecting debt repayment in F2025 and a combination of debt repayment and EBITDA growth in F2027, such that the Company should achieve its long-term net leverage target of low 3.0x during this period.

CREDIT RATING RATIONALE
The credit ratings consider the Company's established footprint in existing markets, the growth potential of the U.S. broadband and mobile services at Breezeline, and Cogeco's expected entry into the Canadian mobile market. The credit ratings also reflect intensifying competition in both the United States and Canada, the risks associated with technological and regulatory changes, and the resources required to develop a successful wireless offering.

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 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 Cogeco Communications Inc., the relative weighting of the BRA factors was approximately equal.

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

(C) Weighting of the BRA and the FRA
In the analysis of Cogeco Communications Inc., 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 Communications Industry (June 26, 2024), https://dbrs.morningstar.com/research/435057

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 methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186
-- 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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