Morningstar DBRS Confirms Corus Entertainment Inc. at B (low) With Negative Trend

DBRS Limited (Morningstar DBRS) resolved the Under Review with Negative Implications status of Corus Entertainment Inc. (Corus or the Company) by confirming the Issuer Rating at B (low) and the credit rating on its Senior Unsecured Notes at CCC (high) with a recovery rating of RR5 and placing all trends as Negative. Morningstar DBRS initially placed the Company's credit ratings Under Review With Negative Implications on July 19, 2024.

KEY CREDIT RATING CONSIDERATIONS
The confirmations reflect Morningstar DBRS' expectation of a stabilization in the outlook of Corus' earnings profile over the near term. This is not to imply that earnings are expected to grow in F2025 but rather that the pace of earnings decline is expected to moderate in the F2025-F2026 period as there has become more clarity in the Company's programming schedule, and aggressive cost measures should help to support a return to EBITDA growth in the medium term.

As outlined in Morningstar DBRS' press release dated September 13, 2024, Corus' credit ratings have been removed from Under Review with Negative Implications owing to the renegotiation of the Company's credit agreement that includes covenant relief from the prior, more restrictive, regime. However, despite the additional leverage cushion, which allows for total debt-to-cash flow to be 5.75 times (x) through December 31, 2024, and 7.25x from January 1, 2025, through to and including March 31, 2025, Morningstar DBRS has placed the ratings on Negative trend owing in large part to the relatively short period of relief provided by the renegotiated credit agreement and ongoing earnings pressure.

Since Morningstar DBRS' most recent review on September 16, 2024, Corus reported fiscal 2024 revenue of $1.27 billion, which was down 16% year over year (YOY) and EBITDA of $283 million, which was down 15% YOY, reflecting a continued weak television advertising environment, partially offset by cost efficiency initiatives, headcount reductions, and lower programming costs in early F2024 owing to strike activity in the U.S. Despite the challenging operating environment, free cash flow after dividends, but before changes in working capital, was $61 million, up 26% YOY, which supported $39 million in debt reduction. At YE2024 gross debt was $1.17 billion compared with $1.22 billion in the prior year period. YE2024 leverage increased to 4.13x, up from 3.65x as the YOY decline in EBITDA more than offset the marginal reduction in debt balances.

CREDIT RATING DRIVERS
While the confirmation of the ratings reflects Morningstar DBRS' view that Corus should be able to remain in compliance with the leverage covenants in its renegotiated credit agreement, the Negative trend reflects the uncertainty about Corus' ability to secure a longer-term (i.e., ideally over 12 months) credit agreement with covenant terms that reflect the reality of the Company's operating environment and strategic priority of becoming a smaller, but more profitable, broadcaster. As a result, if Corus is unable to renegotiate its credit agreement with an appropriate covenant regime, and/or the Company's operating results deteriorate materially below current expectations such that a breach of an even more lenient covenant package appears likely, or in the event of a debt restructuring, a negative rating action would likely occur.

Conversely, a positive rating action, such as moving the trend to Stable, may occur if the Company is able to execute on its strategy to return to earnings growth and/or successfully negotiate a more permanent amendment to its credit facility agreement that is accepted by all stakeholders and enables Corus to remain in compliance with all applicable covenants.

EARNINGS OUTLOOK
While a relative oversupply of advertising inventory, a late start to the fall program, and the initial costs related to the launch of two new lifestyle specialty channels (Flavour Network and Home Network) brands on December 30, 2024, are expected to pressure results in F2025, Morningstar DBRS anticipates the YOY decline in earnings to slow in F2026 before resuming growth in F2027. Reflecting a challenging revenue outlook, while acknowledging the cost-cutting initiatives currently underway and the possibility of additional cost-cutting measures, Morningstar DBRS expects F2025 EBITDA to be down in the 20% range and slow to a high double-digit YOY decline in F2026.

FINANCIAL OUTLOOK
Looking at the financial profile, Morningstar DBRS estimates F2025 free cash flow (after dividends and before changes in working capital) will be between $20 million to $25 million but expects the net change in cash will be modestly negative in F2025 compared with $26 million in F2024. Further, despite a modest YOY reduction in debt and reflecting a material decline in EBITDA, gross leverage is expected to be more than 5.00x at YE2025.

CREDIT RATING RATIONALE
Corus' credit ratings are supported by its ability to create unique Canadian shows, its broad programming appeal across multiple formats, and continued development of its streaming portfolio. The credit ratings also acknowledge the structural shift in advertising spend to digital channels from traditional media, persistent cord cutting, and the increasing selection of media and entertainment options for consumers.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or 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) https://dbrs.morningstar.com/research/437781

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of Corus Entertainment Inc., the relative weighting of the BRA factors was approximately equal.

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

(C) Weighting of the BRA and the FRA
In the analysis of Corus Entertainment 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 Broadcasting Industry (April 15, 2024),
https://dbrs.morningstar.com/research/431165

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 ESG 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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