DBRS Confirms Cogeco Cable Inc.’s Ratings, All Trends Stable

DBRS Limited (DBRS) has today confirmed Cogeco Cable Inc.’s (Cogeco or the Company) Issuer Rating at BB (high), its Senior Secured Notes & Debentures rating at BBB (low) with a recovery rating of RR1, and its Senior Unsecured Notes rating at BB with a recovery rating of RR5. The confirmations reflect Cogeco’s continued efforts to diversify earnings while financing new investments in an acceptable manner for the current ratings. In general, the ratings continue to be supported by the Company’s established footprint in existing markets, the growth potential of data services and U.S. cable segments, while reflecting intensifying competition, risks associated with technological and regulatory change, the Company’s smaller scale and lack of wireless offerings.

Cogeco’s consolidated revenues rose by 4.9% year over year (YOY) to over $2.0 billion in F2015, driven by sound organic growth in the American cable segment and the launch of the TiVo digital video service in Canada, combined with rate increases and currency tailwinds. Operating margins declined marginally to 45.5%, resulting in EBITDA climbing 4.2% YOY to $930 million in F2015. Gross debt-to-EBITDA rose to 3.53 times (x) as at August 31, 2015, compared with 3.04x a year prior, because of the debt-financed acquisition of MetroCast Communications of Connecticut, LLC (MetroCast) for USD 200 million, which occurred just before the end of F2015. Otherwise, the Company’s financial profile remained sound for the rating category, based on strong free cash flow generation and healthy coverage ratios.

Going forward, DBRS expects Cogeco’s earnings profile to remain relatively stable, as growth prospects in the U.S. cable segment and a restructured enterprise segment help to buttress slow growth in the core business over the near term. That said, DBRS will continue to focus on subscriber erosion and the competitive landscape in Canada, as well as monitor progress within the enterprise segment and risks associated with potential acquisitions. Revenues are projected to grow in the high single digits to $2.2 billion in F2016, reflecting the near full-year inclusion of the MetroCast acquisition, price increases, an expected pick-up of activity within the enterprise segment and currency tailwinds. EBITDA margins are expected to contract to the low 45% range because of growth in the lower-margin U.S. cable business, and escalating programming and marketing spending, partly offset by operational efficiencies. As such, EBITDA is expected to rise to between $990 million and $1.0 billion in F2016.

DBRS expects the Company’s financial profile to remain adequate for the current rating categories over the near term. In F2016, DBRS expects cash flow from operations to grow to between $770 million and $790 million. Capex and cash dividends are expected to amount to a combined total of over $530 million. As such, free cash flow before changes in working capital should be in the $230 million to $250 million range. DBRS understands that management continues to explore potential tuck-in acquisitions within the fragmented U.S. cable market. DBRS believes that Cogeco maintains some flexibility within the current ratings to use free cash flow and/or incremental debt to finance acquisitions. If no acquisitions are undertaken, Cogeco could bring gross debt-to-EBITDA down toward 3.0x within 12 months through a combination of debt repayment and EBITDA growth.

DBRS has concluded that holders of the Senior Secured Notes & Debentures could likely recover 100% of their value in a default scenario, a level that corresponds with a recovery rating of RR1. In accordance with the criteria “DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers,” DBRS has confirmed a security rating of BBB (low) for Cogeco’s Senior Secured Notes & Debentures, one notch above the Issuer Rating of BB (high). DBRS has also concluded that the holders of the Senior Unsecured Debt could likely recover 10% to 30% of their value in a default scenario, a level that corresponds with a recovery rating of RR5. Also in accordance with these criteria, DBRS has confirmed a security rating of BB for Cogeco’s Senior Unsecured Debt, one notch below the Issuer Rating of BB (high).

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Communications Industry and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.