Fitch Affirms Cogeco's IDR at 'BB+'; Outlook Stable

COGECO

16/01/2019 16:08

(The following statement was released by the rating agency)


Fitch Ratings-Chicago-January 16: Fitch Ratings has affirmed the Issuer Default 
Rating (IDR) for Cogeco Communications Inc. (Cogeco) at 'BB+'. The Rating 
Outlook is Stable. A full list of affirmed ratings follows at the end of this 
release.

KEY RATING DRIVERS

Enhanced Geographic Diversity: Cogeco has materially increased cash flow 
diversification primarily through several acquisitions of U.S. cable assets. Pro 
forma for the recent MetroCast acquisition, the U.S. (Atlantic Broadband) and 
Canadian (Cogeco Connexion) broadband operations generate approximately 37% and 
57% of consolidated EBITDA, respectively. This compares with six years ago when 
the Canadian broadband segment generated 90% of consolidated EBITDA. Over the 
longer term, the American broadband assets should demonstrate stronger growth 
than the more mature Canadian operations, supported by broadband, TiVo/bundling 
and business market share gains. 

Deleveraging Expected: The MetroCast transaction, which was valued at USD1.4 
billion, increased pro forma gross leverage at close (January 2018) to 
approximately 3.7x on a consolidated basis compared to 2.6x at the end of fiscal 
2017. Fitch believes Cogeco remains on target with reducing leverage back to the 
low 3x range by the end of fiscal 2019 (August). 

Stable Core Expectations: Fitch believes Cogeco's good business profile is 
primarily supported by the relatively stable, high-margin Canadian broadband 
operations, with a competitive position anchored by its high-speed internet and 
triple-play offering. Cogeco's broadband systems are clustered in less 
competitive, lower density suburban regions. Nevertheless, ongoing cord cutting, 
wireless substitution and promotional activity have pressured the operating 
profile. Challenges with the implementation of the new customer management 
system have also affected both the top line and EBITDA profile in fiscal year 
(FY) 2018. Fitch's forecast assumes a return to more normalized operating trends 
in the Canadian broadband services segment for the remainder of FY2019 following 
steps taken to address customer management system issues.   

Opportunistic Bolt-Ons: Cogeco has continued to seek opportunistic bolt-on U.S. 
cable acquisitions. Fitch does not expect Cogeco to engage in material M&A until 
leverage is reduced back within the expected range. Over the long term, Fitch 
expects U.S. operations will approach at least the size of the Canadian 
broadband operations. During the first half of 2018, Cogeco acquired 
approximately CAD32 million of paired and unpaired wireless spectrum licenses 
within Cogeco's footprint in the 2,300MHz and 2,500MHz bands that increase its 
flexibility to explore wireless service alternatives. In October 2018, the 
Company completed the second phase of its FiberLight acquisition in Florida for 
$43.8 million.

DERIVATION SUMMARY

Cogeco's business profile is weaker than larger investment-grade telecom/cable 
peers like Rogers Communications (BBB+/Stable) and Telus Inc. (BBB+/Stable) due 
to smaller scale and less service diversification (no wireless) combined with 
higher financial leverage. However, Fitch believes Cogeco has a strong business 
profile, supported by the stable, high-margin Canadian broadband operations, 
with a competitive position anchored by its high-speed internet and triple-play 
offering that leverages the TiVO platform. The solid growth characteristics of 
the Atlantic Broadband business also position Cogeco well relative to its peers. 
Cogeco's operating results have benefitted from 100% of its territories offering 
120Mbps service. Cogeco will continue to further increase broadband speeds (1 
Gbps launches) across a significant portion of its networks (60% in Canada and 
85% for Atlantic Broadband) by the end of fiscal 2019.

KEY ASSUMPTIONS

 Fitch's Key Assumptions within Our Rating Case for the Issuer

--Consolidated revenue growth of approximately 6% in FY2019 with Cogeco 
Connexion remaining relatively flat and Atlantic Broadband increasing in the 
upper-teen range reflecting the full year of the recent acquisitions. In FY2020, 
consolidated revenue growth in the low single digits, with Cogeco Connexion 
increasing low-single digits and Atlantic Broadband increasing mid-single 
digits;

--Relatively stable profitability with EBITDA margins of approximately 45%;

--Dividend payouts of approximately 25% of cash flow;

--Annual FCF (defined as cash from operations less capital spending less 
dividends) in excess of $250 million;

--Leverage in the low 3x range in fiscal 2019 and the upper 2x range in fiscal 
2020;

--The ratings case assumes the Atlantic Broadband segment will make another 
debt-financed acquisition in FY2021 that is similar in scale to MetroCast.

RATING SENSITIVITIES

Developments that May, Individually or Collectively, Lead to Positive Rating 
Action

--A change in financial policy and long-term commitment to maintain consolidated 
leverage at mid-2x range or below;

--Stable and/or growing operating trends across its primary business segments;

--Increased operational diversification;

--Pre-dividend FCF-to-sales of greater than 10%.

Developments that May, Individually or Collectively, Lead to Negative Rating 
Action

--A large transaction that increases consolidated leverage in excess of mid-3x 
range for an extended period of time;

--Greater than expected competition, substitution or cord-cutting/cord-shaving 
in Cogeco Communications territories that adversely affects operating trends and 
cash flow growth;

--A change in financial policy resulting in higher leverage due to increased 
dividends or aggressive share repurchases;

--Reduced consolidated FCF prospects as a result of competitive factors. 

LIQUIDITY

Strong Liquidity: Cogeco's main sources of liquidity are its credit facilities, 
cash position and FCF. As of Nov. 30, 2018 Cogeco had approximately CAD242 
million available under its term revolving facility of CAD800 million that 
matures in January 2024. In addition, two subsidiaries of Cogeco benefit from a 
revolving facility of USD150 million maturing January 2023, of which USD7.1 
million was borrowed, leaving USD143 million of availability. Consolidated cash 
was CAD71 million. 

Expectations are that Cogeco will maintain a dividend policy consistent with its 
current ratings. Cogeco's objective is to generate shareholder returns through 
capital appreciation and dividend growth. Historically, Cogeco has not generally 
engaged in share repurchase activity, which Fitch does not see as changing at 
this time. The quarterly dividend has increased to CAD0.525 per share from 
CAD0.475 per share, an increase of approximately 11%, from a year ago. 

Fitch's forecast assumes Cogeco will increase dividends in a similar range over 
the next couple of years as a result of growth in excess cash flows. Thus, while 
Cogeco does not have a formal dividend policy, Fitch expects the company will 
target a dividend payout in the range of 25%-30% of FCF before dividends and 
working capital. Fitch anticipates FCF in excess of CAD250 million during the 
forecast period. Cogeco's current payout ratio is materially lower than its 
larger cable and telecom peers.

The Company has no material maturities in fiscal 2019 or fiscal 2020. In fiscal 
2021, Cogeco has CAD200 million of 5.15% notes maturing. First-lien credit 
facility debt at Cogeco's U.S. subsidiaries approximates 60% of Cogeco's capital 
structure. While the debt is nonrecourse to Cogeco, Fitch has consolidated the 
U.S. subsidiary debt given the strategic importance of the U.S. operations, 
which serve as the primary beachhead for M&A opportunities.

Fitch does not expect Atlantic Broadband to issue dividends during the next 
several years given its growth focus. Cogeco's agreement with Caisse de depot et 
placement du Quebec, which has taken a 21% ownership interest in Atlantic 
Broadband, is long-term in nature with no put option for several years. Cogeco 
does not expect to pay meaningful cash taxes from its U.S. subsidiaries for the 
next couple of years due to a substantial tax shield. Cogeco also receives 
material tax benefits in Canada from deductibility related to Atlantic 
Broadband's interest payments.

FULL LIST OF RATING ACTIONS

Fitch has affirmed Cogeco's rating as follows: 

Cogeco Communications Inc. 

-- Long-Term IDR at 'BB+'.

The Rating Outlook is Stable.

Contact: 

Primary Analyst

William Densmore

Senior Director

+1-312-368-3125

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

Secondary Analyst

David Peterson

Senior Director

+1-312-368-3177

Committee Chairperson

Jack Kranefuss

Senior Director

+1-212-908-0791

Summary of Financial Statement Adjustments - Financial statement adjustments 
that depart materially from those contained in the published financial 
statements of the relevant rated entity or obligor are disclosed below: 

--No material adjustments have been made that have not been disclosed in public 
fillings of this issuer.

Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: 
elizabeth.fogerty@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023785

Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10024585

Sector Navigators (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023790

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10059506

Solicitation Status 

https://www.fitchratings.com/site/pr/10059506#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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