TEXT - Fitch affirms Cogeco Cable Inc rating at 'BBB-'

Mon Dec 3, 2012 10:10am EST

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Dec 3 - Fitch Ratings has affirmed all ratings for Cogeco Cable Inc.
 (Cogeco) at 'BBB-'. Fitch has also removed Cogeco from Rating Watch 
Negative.

The Rating Outlook is Stable. 

Cogeco

--Issuer Default Rating at 'BBB-'.
--Senior secured notes at 'BBB-'.

The rating affirmation is the result of Cogeco closing its $1.36 billion 
acquisition for Atlantic Broadband Group, LLC (ABB). Financing for the 
transaction includes $660 million committed first lien term loan at ABB that is 
non-recourse debt to Cogeco. Leverage pro forma for the acquisition would 
increase to approximately 2.7x at Cogeco Cable (3.1x on a consolidated basis) 
which is outside of Fitch's expectations for its leverage range. Longer-term 
expectations for Cogeco ratings include leverage of approximately 2.5x or less. 
Fitch expects Cogeco will reduce leverage back to this range within the next 12 
- 15 months.

The 'BBB-' 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. 

Nevertheless, the competitive intensity in Canada is expected to increase with 
additional IPTV footprint expansion through fiber-to-the-home overbuilds in a 
substantial portion of Cogeco's regions. This will likely increase the pressure 
on primary service unit additions which have been decreasing due to category 
maturity, competitive offerings and tightening of credit controls. Fitch 
believes Cogeco also needs to upgrade technology supporting its video offering 
to better match capabilities with the telco's IPTV video service. 

The increased financial risk due to higher debt levels reduces the tolerance for
potential operational shortfalls associated with greater than expected 
competitive impacts. Operating trends that fall below expectations, thus 
pressuring cash flows and slowing the deleveraging process could warrant changes
in 

Outlook and/or ratings. Cogeco should be able to mitigate 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 will use a material portion of its good 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 Aug. 31, 2012, Cogeco
Cable had no outstandings on its CAD750 million credit facility due 2017 and 
CAD215 million of cash. Cogeco Cable will use proceeds from the $660 million 
first lien term loans at ABB, a substantial drawdown on its revolver and fund 
the remaining portion of the acquisition with cash on hand. Going forward, Fitch
expects Cogeco will restore at least a portion of its liquidity position on the 
revolver. Free cash flow (FCF) for the fiscal year 2012 was CAD42 million after 
dividend payment. Cogeco's current guidance excludes ABB, and after dividend 
payment the company is expected to generate approximately CAD54 million of FCF 
in FY 2013. 

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 much lower than in the past reflecting in part the 
increased leverage resulting from the acquisition and Cogeco's desire to use 
discretionary cash flow to delever the balance sheet.

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. 

The corporate structure used by Cogeco for the ABB acquisition also enables 
material tax related benefits. Consequently, Cogeco's increased interest costs 
are essentially covered through a tax-free interest payment from the 
intercompany subordinated debt at ABB and tax interest deductibility associated 
with the ABB term loan. 

WHAT COULD TRIGGER A RATING ACTION

Negative: Future developments that may, individually or collectively, lead to 
negative rating include:

--Cogeco does not make progress on deleveraging Cogeco Cable below the mid 2.5x 
range in next 12 - 15 months;

--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;

--Reduced free cash flow prospects.

Positive: Fitch believes that the current leverage, smaller operational scale of
operations relative to its peers and increased competitive factors constrain 
upward movement in the ratings. As a result, Fitch's sensitivities do not 
currently anticipate developments with a material likelihood, individually or 
collectively, of leading to a rating upgrade.
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