(The following statement was released by the rating agency)
Dec 12 -
Summary analysis -- Quebecor Media Inc. --------------------------- 12-Dec-2012
CREDIT RATING: BB/Stable/-- Country: Canada
Primary SIC: Cable and other
pay TV services
Mult. CUSIP6: 74819R
Credit Rating History:
Local currency Foreign currency
09-Dec-2010 BB/-- BB/--
29-Sep-2003 BB-/-- BB-/--
The ratings on Montreal-based Quebecor Media Inc. (QMI) are based on Standard & Poor’s Ratings Services’ credit risk profile of the company and its consolidated subsidiaries, including wholly owned Videotron Ltee (BB/Stable/--), the largest cable TV provider in Quebec and third-largest in Canada; 100%-owned Sun Media Corp., the largest newspaper publisher in Canada; and 51.5%-owned TVA Group Inc., the largest private-sector French language broadcaster in North America. The long-term corporate credit ratings on Videotron are equalized with those on parent QMI as per Standard & Poor’s corporate ratings criteria.
The ratings on QMI reflect Standard & Poor’s view of the company’s “significant” financial risk profile characterized by what we view as its “aggressive” financial policy given QMI’s growth focus and high tolerance for debt. Following the company’s C$1 billion debt-funded share repurchase on Oct. 11, 2012, combined with various growth initiatives in the next couple of years, we expect QMI’s consolidated credit ratios to be at the lower end of our significant financial risk profile guideline (see “Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,” published May 27, 2009, on RatingsDirect on the Global Credit Portal). We also expect discretionary free operating cash flow (after dividends) to be minimal in the next three years, which precludes the company reducing material debt. Furthermore, we base the ratings on what we consider the “weak” business risk profile of QMI’s mature newspaper operations, which are facing industry-specific as well as economy-related challenges; intense competition at the company’s various business segments; and high capital expenditures in the telecommunications segment needed to sustain competitiveness. Standard & Poor’s notes that Videotron’s launch of a facilities-based wireless service in Quebec, while potentially positive in the long term, requires significant investment in the near term, pressuring overall profitability and constraining free operating cash flow improvements.
Partially offsetting these factors is what we view as the investment-grade business risk profile of QMI’s regional telecommunications operations (branded as Videotron), which comprised about 61% and 88% of the company’s total revenue and reported EBITDA, respectively, for the nine months ended Sept. 30, 2012. Videotron’s operating performance is favorable, with the company demonstrating above (industry) average retention of basic cable TV customers through its multi-product bundling strategy, enhanced service quality, growth of new services, and protection of overall profitability despite start-up losses stemming from the launch of wireless services. While less material, the ratings also benefit from the added diversity provided by the company’s various media operations, which should continue generating meaningful (albeit lower) free operating cash flow in the next few years despite revenue challenges. We assess the company’s management and governance as “fair” as per our criteria.
On Oct. 11, 2012, QMI and parent Quebecor Inc. (QI; not rated) completed the combined repurchase of C$1.5 billion of shares from Caisse de depot et placement du Quebec (CDP; AAA/Stable/A-1+), which increased QI’s ownership of QMI to 75.4% from 54.7%. The share repurchase was the result of QM, QI, and CDP’s desire to address QM’s ownership structure in the long term and could represent the first phase of a multi-year exit strategy. As noted above, QMI’s C$1 billion portion of the share repurchase weakens the consolidated adjusted debt-to-trailing 12-month EBITDA ratio to the low-4.0x area from 3.1x at Sept. 30, 2012, while adjusted funds from operations to debt weakens to about 20% from 26%. Nevertheless, for now the higher leverage is acceptable to Standard & Poor‘s, given that QMI’s core cable TV operations (which provide good revenue and cash flow visibility from a largely subscription-based business) are performing well and the company’s liquidity is adequate. We note that, at present, our ratings on QMI do not incorporate the financial risk of additional debt-funded share repurchases from CDP by QMI or QI, but the likelihood of such an event will likely weigh on our ratings for the foreseeable future.
While we do not expect QMI to reduce debt in the next couple of years (given our assumption of minimal discretionary free cash flow after dividends, in part owing to the recapitalization), the company should be able to manage its adjusted debt-to-EBITDA ratio at the 4x area, which lends support to the ratings, in our opinion. Our assumption of higher capital expenditures for the next two years provide the company with adequate flexibility to invest in its telecommunications operations, which should allow it to defend its market position in cable (against rising broadband and video competition from telcos) in addition to pursuing long-term growth opportunities (principally wireless).
Standard & Poor’s notes that its ratings on QMI reflect the stand-alone credit profile of the company despite the significant influence of QI. However, should QI pursue additional investments in the future or cause QMI’s financial policies to become more aggressive (likely to support higher dividends at the parent or to service debt-financed parent acquisitions), which could materially weaken the overall credit profile, Standard & Poor’s could attribute greater risk to QMI. This linkage could affect the ratings on QMI even in the absence of any adverse developments at QMI itself.
Standard & Poor’s assesses QMI’s liquidity as adequate, as per our definitions. We expect the company’s sources of liquidity to exceed uses by more than 1.5x in the next 12 months with sources to exceed uses even if EBITDA unexpectedly declines by 15%. Sources of cash in the next 12 months comprise consolidated cash balances of about C$355 million at Sept. 30, 2012, availability through various credit facilities of more than C$875 million, and our expectations that the company will generate pro forma cash flow from operations of about C$1 billion in the next 12 months.
Uses of funds in the next 12 months primarily consists of our assumption of a historically high but stable level of capital expenditures to protect QMI’s cable base and drive growth in new areas, shareholder dividends of about C$100 million, some tuck-in investments, and the prospect of a wireless spectrum purchase. QMI has access to cash flows generated by its subsidiaries through dividends (or distributions) and cash advances paid by its wholly owned subsidiaries.
We also note that QMI and its wholly owned subsidiaries have sufficient flexibility to provide funding to the parent or subsidiaries, as needed. The company and its subsidiaries have modest debt maturities in the next two years of about C$200 million in 2013 and C$140 million in 2014 and sufficient headroom with respect to the financial covenants at each of QMI and Videotron; however, we note that QMI has a significant debt maturity (US$645 million outstanding, following the early redemption of US$320 million in October 2012) due March 2016 that could pose a long-term refinancing risk. Nevertheless, we believe that the company and its subsidiaries (in particular Videotron) have good access to capital markets as evidenced by QMI’s C$1.35 billion equivalent senior notes issuance on Oct. 11, 2012.
We rate QMI’s secured debt ‘BB-’ (one notch below the corporate credit rating on the company) with a ‘5’ recovery rating, and its unsecured debt outstanding ‘B+’ (two notches lower than the corporate credit rating on the company), with a ‘6’ recovery rating. In addition, we rate Videotron’s unsecured debt ‘BB’ (the same as the corporate credit rating on QMI), with a ‘3’ recovery rating.
(For the most recent recovery analysis on QMI and its subsidiaries, see “Recovery Report: Quebecor Media Inc.’s Recovery Rating Profile,” published Oct. 4, 2012, on RatingsDirect on the Global Credit Portal.)
The stable outlook reflects our expectation that growth at QMI’s telecommunication operations will more than offset weakness at the news media segment and that the company should be able to generate sufficient internal cash flow to fund growth initiatives while largely protecting its cable customer base against rising competition. Although debt levels could increase modestly in 2013 to accommodate growth at wireless, we believe that QMI’s adjusted debt-to-EBITDA ratio will not vary materially from the 4x area in the next couple of years. Consideration for an upgrade will depend on the company demonstrating that it can sustain an adjusted debt-to-EBITDA ratio below 3.5x, which appears challenging given our assumptions, and the potential for additional share repurchases in the future. We would consider a downgrade should the company embark on a more aggressive investment strategy or pursue additional debt-funded share repurchases, which push adjusted debt leverage to the 4.5x area.
Related Criteria And Research
-- Methodology and Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Key Credit Factors: Business And Financial Risks In The Global Telecommunication, Cable, And Satellite Broadcast Industry, Jan. 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008