DBRS Confirms Torstar Corporation at BBB, Stable Trend

DBRS has today confirmed the Medium-Term Notes rating of Torstar Corporation (Torstar or the Company) at BBB. The trend is Stable.

The rating continues to be supported by Torstar’s leading market position and its diverse operations, including community-based non-daily newspapers, leading metropolitan dailies, book publishing and a strong portfolio of digital properties. This diversification, including a favourable mix of community-based publications over major metropolitan newspapers, continues to help insulate the Company from some of the structural challenges affecting more traditional newspaper operators across North America.

DBRS recognizes that ongoing structural adjustments (including declining circulation, linage and line rate erosion) continue to plague major metropolitan dailies such as the Company’s flagship Toronto Star. However, as a whole, the Star Media Group (Star Media) makes up less than 25% of the Company’s consolidated EBITDA, and the Toronto Star, while still relevant, is becoming an increasingly smaller fraction of this entire segment and of Torstar’s overall financial profile.

As a result, with respect to its traditional newspaper business, Torstar’s consolidated financial profile is increasingly centered on Metroland Media Group Ltd. (Metroland; just under 60% of EBITDA), which maintains a strong business risk profile due to its composition of smaller, community-based non-daily publications. Also, given its limited dependence on the volatile national advertising market, Metroland is also more resilient to weaker economic conditions and significantly more immune to the ongoing structural adjustments impacting major dailies.

In addition, following a period of weaker operational and financial performance, Torstar’s Harlequin Enterprises Limited (Harlequin) has now demonstrated a degree of stabilization, and continues to make its contribution to the overall stability of the Company’s consolidated financial profile (just under 30% of EBITDA).

That said, DBRS expects that current softness in the broader Ontario economy will make it challenging for Torstar to generate meaningful organic growth during the year and, as a result, the Company’s financial profile is expected to weaken modestly in 2008.

However, Torstar’s unique business mix should also help cushion the overall adverse effects of expected cyclical pressure, and Torstar is expected to continue to generate healthy levels of free cash flow in 2008 (albeit at moderately lower levels). Beyond 2008, free cash flow is expected to regain a mild growth trajectory, in line with cash flow from operations, which is also expected to generate modest improvements in 2009.

Consistent with past practice, Torstar is expected to continue to use its free cash flow for moderate debt reduction during the remainder of the year. However, DBRS does not expect lower debt levels in 2008 to entirely offset the cyclical pressures impacting the Company’s financial profile during the year. On a year-over-year basis, lower EBITDA and modestly lower cash flow from operations are expected to have a minor impact on Torstar’s financial metrics.

In a normal economic environment, DBRS would expect Torstar’s financial risk profile to remain stable, improving moderately in line with debt reduction. However, given recent economic uncertainty and instability at the Toronto Star, DBRS notes that Torstar’s ratings are likely precluded from improving beyond their current level for the time being.

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