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

DBRS has today confirmed the stability rating for CanWest MediaWorks Income Fund (the Fund) at STA-3 (high). The rating reflects the Fund’s continuing stable cash flow from operations, underpinned by the Fund’s strong franchise of newspaper and digital media publications, and low capital requirements.

Despite recent softness in advertising and industry trends that include a slow decline in circulation for print media, the Fund has demonstrated moderate EBITDA growth over the latest period, driven largely by cost reductions and restructuring initiatives. DBRS believes that recent restructuring efforts are now largely complete and have become accretive to EBITDA and cash flow from operations.

Additionally, the Fund continues its strategic shift to generate more online and digital content to help improve advertising sales and maintain readership. While digital media continues to remain a small contributor to revenue to date, online revenue has grown steadily, benefited by the Fund’s strong online assets including canada.com.

Going forward, DBRS expects the Fund to generate EBITDA growth in the mid single-digit range as recent cost savings continue to be accretive through the balance of the year leading to slight improvement in EBITDA margins through F2007. DBRS also expects that cash available for distribution should demonstrate moderate to stable growth through F2007 as slightly higher cash flow from operations are offset by a similar increase in capital expenditures, which DBRS expects to be between roughly $35 million and $40 million over the year. As such, the Fund’s payout ratio is expected to remain stable in the low 90% range through F2007.

In terms of growth, DBRS notes that given the Fund’s 90% payout ratio and current restrictions on Income Fund expansion, future small “tuck-in” acquisitions are possible, but DBRS expects that the majority of the Fund’s future growth in cash available for distribution will likely continue to be organic, driven largely by digital media, advertising rate increases and cost efficiencies.

Finally, in light of proposed income trust tax legislative changes, the Fund continues to review its strategic options in order to determine the most appropriate and efficient structure over the longer term. Currently, the outcomes of any such decision are not factored into the stability rating. DBRS notes that the Fund recently announced that is has established a special committee to review various alternatives to its current structure, which could include a potential privatization of the Fund by its parent, CanWest MediaWorks Inc.

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