February 1, 2013 / 4:00 PM / 5 years ago

TEXT-Fitch cuts Cogeco Cable's IDR to 'BB+'

Feb 1 - 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

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 CAD40 million.

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 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
technology 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

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
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below