TEXT - Fitch may cut Cogeco Cable Inc ratings

Fri Dec 21, 2012 3:40pm EST

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Dec 21 - Fitch Ratings has placed the following Cogeco Cable Inc. (Cogeco)
ratings on Rating Watch Negative: 

Cogeco

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

The actions reflect the agreement reached by Cogeco to acquire PEER 1 Network 
Enterprises, Inc. (PEER 1) for approximately CAD634 million. The financing for 
the transaction will include a new CAD250 million revolving facility and CAD375 
million term loan. The transaction is subject to Hart-Scott-Rodino Act Clearance
in the U.S. and is not reviewable under the Competition Act or regulator in 
Canada. The offer is conditional on the tendering of at least two thirds of the 
issued and outstanding PEER 1 shares to the offer. Sixty two percent of PEER 1's
shareholders have entered into lock-up agreements supporting the transaction. 
The transaction, if approved, is expected to close in early February 2013.

The rating action reflects Fitch's need to assess the effect of the transaction 
on Cogeco's credit profile and longer-term capital structure. Current leverage 
pro forma at the November closing for the Atlantic Broadband (ABB) acquisition 
is 2.7 times (x) at Cogeco (3.1x on a consolidated basis) which is outside of 
Fitch's expectations for Cogeco's rating. On a pro forma basis, considering the 
PEER 1 acquisition, Cogeco's leverage would increase to 3.7x. 

In order to maintain its current rating, Cogeco management would need to 
articulate an additional deleveraging plan that will accelerate current debt 
reduction efforts. Fitch believes, pending final review of the transaction, that
a downgrade, if necessary would be limited to one notch. Fitch's longer-term 
considerations for Cogeco's 'BBB-' ratings included leverage that would 
approximate the mid-2.5x range.

Fitch believes the PEER 1 acquisition while offering a diversified faster 
growing revenue stream has some elevated execution risk as Cogeco pursues growth
and investment opportunities outside of their traditional cable footprint. This 
strategic change 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 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 the tightening of credit controls.

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, would warrant 
changes in the ratings.

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 Aug. 31, 2012, Cogeco
Cable had no outstandings on its CAD750 million credit facility due 2017 and 
CAD215 million of cash. Cogeco Cable used proceeds from the $660 million first 
lien term loan at ABB, a substantial drawdown on its revolver and funded the 
remaining portion of the ABB acquisition with cash on hand. Going forward, Fitch
expects Cogeco will restore at least a portion of its liquidity position on the 
revolver. FCF after dividend payment for the fiscal year 2012 was CAD42 million.
Fitch believes Cogeco will generate a moderately higher level of FCF in fiscal 
year 2013.

Cogeco's conservative financial policies have supported 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 ABB acquisition and Cogeco's desire to use
discretionary cash flow to delever the balance sheet.

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 FCF 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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