|[February 01, 2013]
Fitch Downgrades Cogeco Cable's IDR to 'BB+'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has downgraded the Issuer Default Rating (IDR) for Cogeco
Cable Inc. (Cogeco) to 'BB+' from 'BBB-'. The long-term rating for the
secured notes are affirmed at 'BBB-'. Fitch has removed Cogeco from
Rating Watch Negative.
The Rating Outlook is Stable.
Fitch has downgraded Cogeco's IDR due to the further deterioration in
the company's credit profile resulting from closing its more recent debt
financed acquisition. Consequently, debt has increased pro forma for the
acquisitions to 3.6 times (x) excluding the non-guaranteed debt at
Atlantic Broadband (ABB). Cogeco's leverage at the November 2012 closing
of the ABB acquisition was 2.7x, an increase from 1.8x. The long-term
leverage expectations for Cogeco ratings at the 'BBB-' level was
leverage of approximately 2.5x or less. Fitch does not expect Cogeco
will reduce leverage back to this range within the next 12-15 months
although leverage should reduce going forward due to both cash flow
growth and debt repayment but remain above 3x at year-end 2013.
The 'BB+' ratings reflect Cogeco Cable's stable operating profile and
the strength of the Canadian operations that generate the majority of
the company's revenue and cash flow. Fitch believes that the Canadian
operations are well supported by Cogeco Cable's competitive position
anchored by its high speed internet and triple play offering. The cable
systems are also clustered in less concentrated and generally less
competitive suburban regions.
The PEER 1 Network Enterprises Inc. (PEER 1) acquisition offers a
diversified faster growing revenue stream although it has some elevated
execution risk as Cogeco pursues growth and investment opportunities
outside of their traditional cable footprint. PEER 1's core business of
managed services and web hosting is highly and increasingly competitive.
PEER 1 focuses on delivering quality service and support to
differentiate from competition that is mainly from managed and dedicated
cloud providers along with local and regional operators. PEER 1 has a
relatively large SMB customer base with no customer representing more
than 5% of revenues.
Fitch does not expect PEER 1 operations to contribute meaningful free
cash flow during the next several years given the higher capital
intensity rates and need to further scale the operations. Thus PEER 1
could require additional working capital to support ongoing operations
and expansion. LTM EBITDA and capital spending were both approximately
Cogeco's strategic shift in pursuing its last two acquisitions is a
result of the maturing of cable services and the competitive intensity
that has lowered growth prospects for the cable operations. The
competitive intensity in Canada is expected to increase with additional
IPTV (News - Alert) footprint expansion through fiber-to-the-home overbuilds in a
material portion of Cogeco's regions. This will increase the pressure on
primary service unit additions which have been decreasing due to factors
mentioned above along with economic uncertainty and the tightening of
credit controls. Fitch believes Cogeco also needs to upgrade technoloy
supporting its video offering to better match capabilities with the
telco's IPTV video service.
Cogeco should be able to mitigate revenue pressure through rate
increases and SMB primary service unit additions which will become an
increasingly important offset. In addition, the enterprise services
segment provides a growing diversified revenue stream with good margins.
Cogeco's capital spending intensity has been elevated relative to its
peers due to success-based spending within this segment.
Cogeco used a material portion of its liquidity position to close the
ABB acquisition. Cogeco's main sources of liquidity are through its
credit facilities, cash position, and free cash flow (FCF). As of Nov.
30, 2012, Cogeco Cable had drawn down CAD584 million on its CAD750
million credit facility due 2017 and had CAD9 million of cash. In
connection with the PEER 1 closing, Cogeco entered into new acquisition
facilities. This includes a four year CAD250 million secured revolving
credit facility and a four year approximately CAD equivalent $400
million secured term loan as a portion of the draw was in US dollars.
Going forward, Fitch expects Cogeco will restore at least a portion of
its liquidity position using FCF to pay down the revolver over the next
couple of years. Free cash flow (FCF) for the fiscal year 2012 was CAD42
million after dividend payment. Cogeco's current FCF guidance (excluding
PEER 1) after dividend payment for FY2013 is in excess of CAD100 million.
Cogeco's conservative financial policies also support its current
ratings. The company does not have an active share program. Additionally
the most recent dividend increase of 4% is lower than in the past
reflecting in part the increased leverage resulting from the acquisition.
Importantly, Fitch believes the new ABB subsidiary should be in a
self-funding position. This is supported by ABB's current cash
generation, a substantial tax shield related to net operating losses, a
competitive environment with limited triple play competition and the
expected growth from increasing underpenetrated services. ABB will
increase success-based capital spending which should improve its
competitive position relative to satellite operators which is the
primary competitor in approximately three quarters of its markets.
Negative: Future developments that may, individually or collectively,
lead to negative rating include:
--Cogeco Cable leverage stays in the mid 3.5x range reflecting lack of
cash flow growth and debt reduction;
--An additional material leveraging transaction;
--Greater than expected IPTV competition in Cogeco Cable territory that
adversely affects operating trends;
--Negative operating trends in the Atlantic Broadband operations that
requires Cogeco Cable to infuse additional funding;
--Large debt-financed acquisition;
--Reduced free cash flow prospects.
Positive: Future developments that may, individually or collectively,
lead to positive rating include:
--Cogeco Cable leverage improves to less than 2.5x due to strong cash
growth and debt reduction;
--Good operating trends across its three business segments;
--Pre-dividend FCF to sales of greater than 10%;
--Financial policy to maintain leverage below 2.5x.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Telecom Companies: Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Telecom Companies
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