TEXT-S&P rates Bragg Communications

-- Atlantic Canada-based cable TV services provider Bragg Communications Inc. is refinancing its debt obligations. -- We are assigning our 'BB-' long-term corporate credit rating, and stable outlook, to the company. -- At the same time, we are assigning our 'BB' issue-level with a '2' recovery rating to Bragg's proposed C$1.75 billion equivalent senior secured bank facilities. -- The stable outlook reflects our expectation that Bragg's mature core cable operations should generate improving free operating cash flow over the next few years, enabling the company to fund growth initiatives while improving adjusted debt to EBITDA ratio to the lower-end of the range we expect for our aggressive financial risk profile assessment. TORONTO (Standard & Poor's) Feb. 3, 2012--Standard & Poor's Ratings Services today said it assigned its 'BB-' long-term corporate credit rating to Atlantic Canada-based cable TV services provider, Bragg Communications Inc. The outlook is stable. At the same time, we assigned our 'BB' issue-level rating and '2' recovery rating to Bragg's proposed C$1.75 billion equivalent senior secured bank facilities, which comprise a C$150 million revolver and C$1.6 billion equivalent of term loans. A '2' recovery rating indicates our expectations of substantial (70%-90%) recovery in the event of default. (For the complete corporate credit rating rationale on Bragg, see the research report to be published on RatingsDirect on the Global Credit Portal, immediately following this media release.) "Bragg will use net proceeds from the planned debt issuance to repay existing debt obligations, purchase certain cable and telecommunication assets, and to pay a one-time dividend to its parent Oxford Communications Inc.," said Standard & Poor's credit analyst Madhav Hari. We expect the refinancing to be completed by March 2012. The ratings on Bragg reflect what we view as its aggressive financial risk profile characterized by weak pro forma adjusted debt to EBITDA ratio and weak cash flow protection credit measures given high ongoing capital expenditures for network expansion and growth initiatives. The ratings also reflect our view of an aggressive financial policy owing to the company's historically high tolerance for debt within its capital structure. The ratings on Bragg, however, benefit from what we see as the company's fair business risk profile supported by its strong and defensible market position as the incumbent provider of cable television and related services in Atlantic Canada, industry-leading penetration of revenue generating units, favorable prospect for growth in the near term, and the company's demonstrated ability to sustain industry-leading profit margins. Tempering factors, in our opinion, include the company's smaller size, operations in smaller markets with less attractive household densities, and somewhat high geographic concentration of cash flow. The company also faces the prospect of rising triple-play competition from large telecom rivals (principally, Bell Aliant Inc. ), ongoing competition from direct-to-home (DTH) satellite television providers, increasing market saturation for its current offerings, risks from technological substitution (for video and fixed-line voice), and the potential for execution challenges with respect to certain new initiatives. Privately held Bragg is the smallest of the five large cable operators in Canada. Based in Halifax, N.S., the company provides analog and digital cable television, high-speed Internet, and telephone services to its customers primarily under the EastLink brand. Bragg operates in nine Canadian provinces, with about half of its subscriber base in Atlantic Canada and the remainder spread out over Ontario and western Canada. Bragg's ownership by direct parent Oxford, and ultimately by the Bragg family, has a neutral overall impact on the ratings at present. The stable outlook reflects our expectation that, in the next couple of years, improving cash flow at Bragg's mature core cable operations should be sufficient to fund its growth initiatives while allowing for modest debt reduction. Under these parameters, we expect the company's adjusted debt to EBITDA ratio to improve to the lower-end of the range we expect for our aggressive financial risk profile assessment. Rising subscriber losses combined with margin pressure in the core cable operations (from rising triple-play competition from telecom rivals) or additional shareholder distributions, which weakens adjusted debt to EBITDA by 1x from our current expectations, could lead us to lower the ratings on Bragg. Upside for the ratings is constrained given increasing competitive risks, potential time to deleverage to our targets, and limited history of free operating cash flow on a sustained basis.