-- Montreal-based Quebecor Media Inc. is repurchasing C$1 billion of its shares from Caisse de depot et placement du Quebec as part of the latter's multi-year exit strategy.
-- As a result, we are affirming our ratings on QMI and its related entities, including our 'BB' long-term corporate credit rating on QMI, given that the increase in QMI's consolidated adjusted debt-to-EBITDA ratio (to the low-4x) is within our expectation for the ratings.
-- At the same time, we are raising our issue-level rating on QMI's senior secured debt to 'BB-' from 'B+', owing to the revision of the recovery rating on these obligations to '5' from '6' following our reassessment of the residual value available to QMI creditors.
-- The stable outlook reflects our view that the strength of QMI's core cable TV operations should allow the company to maintain its adjusted debt-to-EBITDA ratio at the 4x level in the next two years.
Rating Action On Oct. 3, 2012, Standard & Poor's Ratings Services affirmed its 'BB' long-term corporate credit rating on Montreal-based diversified communications and media company Quebecor Media Inc. (QMI) and its related entities following the company's plans to repurchase for cancellation C$1 billion of its shares from Caisse de depot et placement du Quebec (CDP; AAA/Stable/A-1+). The transaction 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) will purchase C$500 million of QMI shares from CDP, thereby increasing its equity interest in QMI to 75.36% from 54.72%. We expect Quebecor Inc. to fund this purchase through a C$500 million 4.125% subordinated convertible debenture due 2018 issued to CDP that, at Quebecor Inc.'s option, can be converted into shares 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 the QMI ratings at present given that, for analytical purposes, we view these obligations as Quebecor Inc. equity.
Separately, we are raising our issue-level rating on QMI's senior secured debt to 'BB-' from 'B+', owing to the revision of the recovery rating on these obligations to '5' from '6', following our reassessment of the residual value available to QMI creditors. The '5' recovery rating indicates our expectation of modest (10%-30%) recovery in the event of default. We are affirming all other issue-level ratings at QMI and its wholly owned cable TV subsidiary Videotron Ltee, and the recovery ratings on these issues are unchanged. QMI reported consolidated gross debt of C$4.2 billion at June 30, 2012, including C$253 million of liability related to cross-currency interest rate swaps.
The planned C$1 billion share repurchase will weaken QMI's consolidated adjusted debt-to-trailing 12-month EBITDA ratio to the low-4.0x area from 3.3x at June 30, 2012, while its adjusted funds from operations to debt will weaken 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 has adequate liquidity. 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 maintain an adjusted debt-to-EBITDA ratio in the 4x area while retaining sufficient flexibility to invest in its cable operations and thereby defend its market position in cable in addition to pursuing long-term growth opportunities (such as wireless).
The ratings on QMI are based on the credit risk profile of the company and its consolidated subsidiaries, including wholly owned Videotron, the largest cable TV provider in Quebec and third-largest in Canada; and 100%-owned Sun Media Corp. (not rated), the largest newspaper publisher in Canada. The 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" (albeit weakened within the category) financial risk profile characterized by an "aggressive" financial policy given its growth focus and high tolerance for debt. Following the aforementioned transaction, combined with targeted growth initiatives in the next couple of years, the company's consolidated credit ratios will be at the lower end of our significant financial risk profile guideline. We also expect discretionary free operating cash flow (after dividends) to be minimal in the next three years precluding a material debt reduction. We also 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 profit margins and constraining free operating cash flow growth.
Partially offsetting these factors is what we view as the investment-grade business risk profile of QMI's telecommunications operations, which comprised about 60% and 84% of the company's total revenue and reported EBITDA, respectively, for the three months ended June 30, 2012. Operating performance at Videotron remains favorable, with the company demonstrating above (industry) average retention of basic customers through its multi-product bundling strategy, enhanced service quality, growth of new services, and protection of 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.
Standard & Poor's notes that the ratings on QMI reflect the stand-alone credit profile of the company despite the significant influence of parent Quebecor Inc. However, should Quebecor Inc. 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 potentially 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 1.2x 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$204 million at June 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.
Use 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 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 and sufficient headroom with respect to the financial covenants at each of QMI and Videotron; however, we note that QMI has a disproportionately large (US$965 million outstanding) debt maturity 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.
Recovery analysis For the most recent recovery analysis on QMI and its subsidiaries, see "Recovery Report: Quebecor Media Inc.'s' Recovery Rating Profile," published Jan. 24, 2012, on RatingsDirect on the Global Credit Portal.
The stable outlook reflects our expectation that growth at QMI's telecommunications 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
-- Key Credit Factors: Business And Financial Risks In The Global Telecommunication, Cable, And Satellite Broadcast Industry, Jan. 27, 2009
-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' 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; Rating Link to Parent, Oct. 28, 2004
Ratings List Ratings Affirmed Quebecor Media Inc.
Corporate credit rating BB/Stable/--
Secured debt BB- Recovery rating 5 Unsecured debt B+ Recovery rating 6 Videotron Ltee Corporate credit rating BB/Stable/-- Unsecured debt BB Recovery rating 3 Rating Raised/Recovery Rating Revised Quebecor Media Inc. To From Senior secured debt BB- B+ Recovery rating 5 6
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at
. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)