DBRS Rates CanWest MediaWorks Income Fund at STA-3 (high)

Dominion Bond Rating Service (“DBRS”) has today assigned a STA-3 (high) rating to the CanWest MediaWorks Income Fund (“CanWest” or the “Fund”). This stability rating reflects the above-average cash flow generated by CanWest’s established newspapers across Canada. However, a rating in the STA-3 range reflects the fact that stable cash flow in the industry remains dependant on advertising revenue (partially subject to economic cycles) and volatile newsprint costs. Although, in recent years the Company has experienced stable newsprint pricing. DBRS notes CanWest’s rating is at the upper end of the range due to the stable cash flow available to unitholders, along with the reasonable payout ratio at 95%. Moreover, maintenance capex needs are low and no large projects are forecasted. Other factors supporting the rating include good market position and asset quality, albeit with average business and growth prospects.

CanWest is one of the largest newspaper publishers in Canada with scale economies and bargaining power. There is significant geographic diversification across Canada (excluding Toronto, which DBRS views as positive). While the newspaper industry at large has been under a slow, long-term declining trend, the newspapers in this portfolio have maintained advertising rates and readership. Even so, these papers will become more pressured by the structural changes taking place marked by a slow decline in circulation, due to the Internet, specialty publications, growth of 24-hour news networks, and lifestyle changes. However, DBRS notes change is expected to be slow, hence the sustainability of the distributions seems reasonable over the near term. Long term, pressure could increase. An advertising downturn or increase in newsprint prices could affect distributions.

DBRS expects revenue to grow in the low single digits in 2006, which should equate to stable distributions in the near-term, when considering costs are relatively fixed/known for 2006 (e.g., newsprint, labour, debt service, capex). However, in the medium- to long-term, CanWest’s 95% payout ratio could limit the degree of strategic flexibility against competitive threats. Some competitors have greater discretion over their cash flow and could launch specialty publications in markets served by CanWest or invest in digital properties that are gaining popularity. Additionally, distributions could come under pressure in the long run if maintenance capex is not sufficient to provide an infrastructure that remains competitive.

DBRS notes the stability rating could improve if the payout ratio was lowered and the excess funds used to reduce debt, providing greater strategic flexibility. Conversely, the stability rating could come under pressure if advertising revenue or readership decline materially.