TEXT-S&P affirms Quebecor Media at 'BB'

Overview

-- Montreal-based Quebecor Media Inc. is repurchasing C$1 billion of itsshares from Caisse de depot et placement du Quebec as part of the latter'smulti-year exit strategy.

-- As a result, we are affirming our ratings on QMI and its relatedentities, including our 'BB' long-term corporate credit rating on QMI, giventhat the increase in QMI's consolidated adjusted debt-to-EBITDA ratio (to thelow-4x) is within our expectation for the ratings.

-- At the same time, we are raising our issue-level rating on QMI'ssenior secured debt to 'BB-' from 'B+', owing to the revision of the recoveryrating on these obligations to '5' from '6' following our reassessment of theresidual value available to QMI creditors.

-- The stable outlook reflects our view that the strength of QMI's corecable TV operations should allow the company to maintain its adjusteddebt-to-EBITDA ratio at the 4x level in the next two years.

Rating ActionOn Oct. 3, 2012, Standard & Poor's Ratings Services affirmed its 'BB'long-term corporate credit rating on Montreal-based diversified communicationsand media company Quebecor Media Inc. (QMI) and its related entities followingthe company's plans to repurchase for cancellation C$1 billion of its sharesfrom Caisse de depot et placement du Quebec (CDP; AAA/Stable/A-1+). Thetransaction represents the first phase of CDP's strategy to exit from its(45.28%) equity investment in QMI.

Concurrent with this transaction, QMI parent Quebecor Inc. (not rated) willpurchase C$500 million of QMI shares from CDP, thereby increasing its equityinterest in QMI to 75.36% from 54.72%. We expect Quebecor Inc. to fund thispurchase through a C$500 million 4.125% subordinated convertible debenture due2018 issued to CDP that, at Quebecor Inc.'s option, can be converted intoshares of Quebecor Inc. or can be redeemed for cash on or before maturity.Quebecor Inc.'s issuance of these debentures does not have an impact on theQMI ratings at present given that, for analytical purposes, we view theseobligations as Quebecor Inc. equity.

Separately, we are raising our issue-level rating on QMI's senior secured debtto 'BB-' from 'B+', owing to the revision of the recovery rating on theseobligations to '5' from '6', following our reassessment of the residual valueavailable to QMI creditors. The '5' recovery rating indicates our expectationof modest (10%-30%) recovery in the event of default. We are affirming allother issue-level ratings at QMI and its wholly owned cable TV subsidiaryVideotron Ltee, and the recovery ratings on these issues are unchanged. QMIreported consolidated gross debt of C$4.2 billion at June 30, 2012, includingC$253 million of liability related to cross-currency interest rate swaps.

Rationale

The planned C$1 billion share repurchase will weaken QMI's consolidatedadjusted debt-to-trailing 12-month EBITDA ratio to the low-4.0x area from 3.3xat June 30, 2012, while its adjusted funds from operations to debt will weakento about 20% from 26%. Nevertheless, for now the higher leverage is acceptableto Standard & Poor's, given that QMI's core cable TV operations (which providegood revenue and cash flow visibility from a largely subscription-basedbusiness) are performing well and the company has adequate liquidity. While wedo not expect QMI to reduce debt in the next couple of years (given ourassumption of minimal discretionary free cash flow after dividends, in partowing to the recapitalization), the company should be able to maintain anadjusted debt-to-EBITDA ratio in the 4x area while retaining sufficientflexibility to invest in its cable operations and thereby defend its marketposition in cable in addition to pursuing long-term growth opportunities (suchas wireless).

The ratings on QMI are based on the credit risk profile of the company and itsconsolidated subsidiaries, including wholly owned Videotron, the largest cableTV provider in Quebec and third-largest in Canada; and 100%-owned Sun MediaCorp. (not rated), the largest newspaper publisher in Canada. The ratings onVideotron are equalized with those on parent QMI as per Standard & Poor'scorporate ratings criteria.

The ratings on QMI reflect Standard & Poor's view of the company's"significant" (albeit weakened within the category) financial risk profilecharacterized by an "aggressive" financial policy given its growth focus andhigh tolerance for debt. Following the aforementioned transaction, combinedwith targeted growth initiatives in the next couple of years, the company'sconsolidated credit ratios will be at the lower end of our significantfinancial risk profile guideline. We also expect discretionary free operatingcash flow (after dividends) to be minimal in the next three years precluding amaterial debt reduction. We also base the ratings on what we consider the weakbusiness risk profile of QMI's mature newspaper operations, which are facingindustry-specific as well as economy-related challenges; intense competitionat the company's various business segments; and high capital expenditures inthe telecommunications segment needed to sustain competitiveness. Standard &Poor's notes that Videotron's launch of a facilities-based wireless service inQuebec, while potentially positive in the long term, requires significantinvestment in the near term, pressuring overall profit margins andconstraining free operating cash flow growth.

Partially offsetting these factors is what we view as the investment-gradebusiness risk profile of QMI's telecommunications operations, which comprisedabout 60% and 84% of the company's total revenue and reported EBITDA,respectively, for the three months ended June 30, 2012. Operating performanceat Videotron remains favorable, with the company demonstrating above(industry) average retention of basic customers through its multi-productbundling strategy, enhanced service quality, growth of new services, andprotection of profitability despite start-up losses stemming from the launchof wireless services. While less material, the ratings also benefit from theadded diversity provided by the company's various media operations, whichshould continue generating meaningful (albeit lower) free operating cash flowin the next few years despite revenue challenges.

Standard & Poor's notes that the ratings on QMI reflect the stand-alone creditprofile of the company despite the significant influence of parent QuebecorInc. However, should Quebecor Inc. pursue additional investments in the futureor cause QMI's financial policies to become more aggressive (likely to supporthigher dividends at the parent or to service debt-financed parentacquisitions), which could potentially weaken the overall credit profile,Standard & Poor's could attribute greater risk to QMI. This linkage couldaffect the ratings on QMI even in the absence of any adverse developments atQMI itself.

Liquidity

Standard & Poor's assesses QMI's liquidity as adequate, as per ourdefinitions. We expect the company's sources of liquidity to exceed uses bymore than 1.2x in the next 12 months with sources to exceed uses even ifEBITDA unexpectedly declines by 15%. Sources of cash in the next 12 monthscomprise consolidated cash balances of about C$204 million at June 30, 2012,availability through various credit facilities of more than C$875 million, andour expectations that the company will generate pro forma cash flow fromoperations of about C$1 billion in the next 12 months.

Use of funds in the next 12 months primarily consists of our assumption of ahistorically high but stable level of capital expenditures to protect QMI'scable base and drive growth in new areas, shareholder dividends of about C$100million, some tuck-in investments, and the prospect of wireless spectrumpurchase. QMI has access to cash flows generated by its subsidiaries throughdividends (or distributions) and cash advances paid by its wholly ownedsubsidiaries.

We also note that QMI and its wholly owned subsidiaries have sufficientflexibility to provide funding to the parent or subsidiaries, as needed. Thecompany and its subsidiaries have modest debt maturities in the next two yearsand sufficient headroom with respect to the financial covenants at each of QMIand Videotron; however, we note that QMI has a disproportionately large(US$965 million outstanding) debt maturity due March 2016 that could pose along-term refinancing risk. Nevertheless, we believe that the company and itssubsidiaries (in particular Videotron) have good access to capital markets.

Recovery analysisFor the most recent recovery analysis on QMI and its subsidiaries, see"Recovery Report: Quebecor Media Inc.'s' Recovery Rating Profile," publishedJan. 24, 2012, on RatingsDirect on the Global Credit Portal.

Outlook

The stable outlook reflects our expectation that growth at QMI'stelecommunications operations will more than offset weakness at the news mediasegment and that the company should be able to generate sufficient internalcash flow to fund growth initiatives while largely protecting its cablecustomer base against rising competition. Although debt levels could increasemodestly in 2013 to accommodate growth at wireless, we believe that QMI'sadjusted debt-to-EBITDA ratio will not vary materially from the 4x area in thenext couple of years. Consideration for an upgrade will depend on the companydemonstrating that it can sustain an adjusted debt-to-EBITDA ratio below 3.5x,which appears challenging given our assumptions, and the potential foradditional share repurchases in the future. We would consider a downgradeshould the company embark on a more aggressive investment strategy or pursueadditional debt-funded share repurchases, which push adjusted debt leverage tothe 4.5x area.

Related Criteria And Research

-- Methodology and Assumptions: Liquidity Descriptors For GlobalCorporate Issuers, Sept. 28, 2011

-- Key Credit Factors: Business And Financial Risks In The GlobalTelecommunication, Cable, And Satellite Broadcast Industry, Jan. 27, 2009

-- Criteria Guidelines For Recovery Ratings On Global IndustrialsIssuers' Speculative-Grade Debt, Aug. 10, 2009

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

-- Corporate Criteria--Parent/Subsidiary Links; General Principles;Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; RatingLink to Parent, Oct. 28, 2004

Ratings ListRatings AffirmedQuebecor Media Inc.

Corporate credit rating BB/Stable/--

Secured debt BB-Recovery rating 5Unsecured debt B+Recovery rating 6Videotron LteeCorporate credit rating BB/Stable/--Unsecured debt BBRecovery rating 3Rating Raised/Recovery Rating RevisedQuebecor Media Inc.To FromSenior secured debt BB- B+Recovery rating 5 6

Complete ratings information is available to subscribers of RatingsDirect onthe Global Credit Portal at

. All ratings affectedby this rating action can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)

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