CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for Cogeco Cable Inc. (Cogeco). The Rating Outlook is Stable. Fitch affirms the following:
--Issuer Default Rating at 'BB+';
--Senior secured notes at 'BBB-';
--Senior unsecured notes at 'BB+'.
KEY RATING DRIVERS
Fitch believes Cogeco's stable operating profile and the strength of the Canadian cable segment that generates the majority of the company's revenue and cash flow materially, benefits its credit profile. Cogeco's competitive position is anchored by its high-speed internet and triple-play offering. The cable systems are clustered in less concentrated and generally less competitive suburban regions as compared to large urban areas.
Cogeco's goal of diversifying its revenue base through its past acquisitions is a result of maturing Canadian cable services, Canadian consolidation that is essentially complete, and the competitive intensity that has lowered growth prospects. Canadian cable growth slowed to approximately 2% for the past 12 months. Consequently, Cogeco now generates 35% of its revenues and approximately 30% of its EBITDA through its faster growing Enterprise Services and American Cable segments. Cogeco's enterprise services segment will require higher capital intensity rates and additional working capital to support ongoing operations and expansion for the next several years.
Competition in Canada will continue to increase over time due to wireless substitution and additional IPTV footprint expansion of fiber-to-the-node overbuilds in a growing portion of Cogeco's regions. This has pressured primary service unit additions which have been decreasing due to factors mentioned above along with economic uncertainty and the past tightening of credit controls. Cogeco is in the process of upgrading technology to support an evolved video distribution platform to improve its competitive offering compared to the enhanced capabilities demonstrated by the telco's IPTV video service. However, the testing and expected deployment of this new IP evolved video distribution platform is taking much longer than initially anticipated due to the technical challenges of implementing new technologies. Thus, Cogeco remains at a slight disadvantage competitively with its video offering.
Cogeco expects to mitigate at least a portion of its consumer Canadian cable revenue pressure through rate increases and SMB primary service unit additions by offering high-speed internet and telephony services, which could become an increasingly important offset. Cogeco Data Services targeting medium to large businesses in the enterprise services segment provides a growing diversified revenue stream with good growth prospects and margins. Cogeco has accelerated capital spending associated with its Barrie data center due to higher than anticipated demand thus delaying the break-even point between EBITDA and capital spending until fiscal year 2015.
The PEER 1 Network Enterprises Inc. (PEER 1) business generates a substantial portion of its revenues outside of Canada thus providing additional diversification as Cogeco pursues investment opportunities outside of their traditional cable footprint. Execution risk is reducing as PEER 1's core business sustains double-digit growth focusing on complex, higher-priced managed services and web hosting solutions that require a greater level of service and support. As such, these higher priced services targeting small and medium sized businesses differentiates the company from the highly competitive areas within the U.S data center segment that have experienced greater pricing pressure. Cogeco has indicated pricing is generally stable to increasing for the majority of its more than 13,000 customers.
Credit Metrics Improving
Cogeco's credit metrics are improving following the acquisitions as total leverage (total debt to operating EBITDA) was 3.4x at the end of the second quarter of fiscal 2014 or 3.3x excluding Atlantic Broadband's operations. Fitch expects Cogeco should achieve its target of reducing leverage to 3x before the end of fiscal year 2015.
Cogeco's main sources of liquidity are through its credit facilities, cash position and free cash flow (FCF). As of Feb. 28, 2014, Cogeco and ABB had approximately CAD229 million and USD80 million available under their bank credit facilities of CAD800 million and USD100 million, respectively. The bank credit facilities mature in January 2019 and November 2017 respectively. Cash was CAD55 million on a consolidated basis. Fitch expects Cogeco will increase available liquidity and reduce leverage by using FCF to pay down bank credit facilities through fiscal year 2015. Cogeco's FCF guidance for FY2014, after dividend payments, is approximately CAD180 million. Cogeco increased its dividend by 15% for fiscal year 2014 to CAD1.20 per share. Going forward, Fitch anticipates Cogeco could increase its dividend at similar rates absent a leveraging transaction or a change in earnings growth expectations. Cogeco's next significant maturity of US190 million is not due until October 2015.
Negative: Future developments that may, individually or collectively, lead to negative rating include:
--A large transaction that increases consolidated leverage to in excess of 3.5x range for an extended period of time;
--Greater than expected IPTV competition in Cogeco Cable territory 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;
--Negative operating trends in the Atlantic Broadband operations that requires Cogeco Cable to infuse additional funding;
--Reduced consolidated free cash flow prospects as a result of competitive factors.
Positive: At this time Fitch does not anticipate a positive rating action. Future developments that may, individually or collectively, lead to positive rating include:
--A change in financial policy and long-term commitment to maintain leverage at mid 2x range or below;
--Stable and/or growing operating trends across its three business segments;
--Increased operational diversification;
--Pre-dividend FCF to sales of greater than 10%.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Rating Telecom Companies: Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective 12 August 2011 to 8 August 2012
Rating Telecom Companies