DBRS Limited (DBRS Morningstar) confirmed Cogeco Communications Inc.’s (Cogeco or the Company) Issuer Rating at BB (high) and its Senior Secured Notes & Debentures rating at BBB (low) with a recovery rating of RR1. All trends are Stable. The rating confirmations are supported by Cogeco’s stable operating results, despite a challenging year. The ratings consider the Company’s established footprint in existing markets, ability to offer a competitive wireline service, and the U.S. broadband segment’s (Atlantic Broadband or ABB) growth potential. The ratings also reflect intensifying competition, risks associated with technological and potential regulatory changes, and the lack of a wireless offering.
Cogeco’s F2020 consolidated revenue was slightly lower than anticipated, but profit was in line with DBRS Morningstar’s forecast based on continued growth in ABB and better-than-expected operating performance in the Canadian broadband segment (Cogeco Connexion), despite the challenging operating environment. F2020 revenue was $2.38 billion (+2.2% year over year (YOY) or +1.5% YOY on a constant-currency basis), driven by mid-single-digit growth at ABB. In F2020, ABB represented 46% of consolidated revenue compared with 39% in F2018 (two-year compound annual growth rate of +14%) as ABB continues to post above-industry growth amid a fragmented competitive landscape. Adjusted EBITDA was $1.15 billion (+3.7% YOY or +3.0% YOY on a constant-currency basis) as both Cogeco Connexion and ABB delivered positive annual growth on a reported and constant-currency basis. Organic top-line growth primarily drove ABB EBITDA growth as the Company leverages its 1Gig service, which is available to approximately 90% of its footprint, and lower operating expenses at Cogeco Connexion primarily because of lower advertising and marketing costs. The F2020 EBITDA margin was 48.2% compared with 47.5% in F2019, reflecting an impressive 54.4% at Cogeco Connexion (+118 basis points (bps) YOY) and 45.2% at ABB (+33 bps YOY).
Cogeco’s financial profile remained supportive of the current ratings. DBRS Morningstar operating cash flow (OCF) increased to $973 million in F2020 compared with $894 million in F2019. F2020 OCF was sufficient to fund Cogeco’s capital expenditure (capex) program ($484 million) and cash dividend payments ($112 million). Free cash flow (after dividends, but before changes in working capital) was $377 million in F2020 compared with $356 million in F2019, despite higher capex and dividend payments. F2020 gross debt-to-EBITDA was 2.72 times (x) compared with DBRS Morningstar’s initial estimate of approximately 3.0x, reflecting both a decline in lease-adjusted gross debt and an increase in EBITDA. In terms of liquidity, Cogeco ended F2020 with approximately $366 million in cash and equivalents, $750 million available on its fully undrawn Canadian credit facility that matures in January 2025, and USD 150 million available on its fully undrawn ABB credit facility that matures in July 2024. DBRS Morningstar notes that the Company has no maturities until February 2022 ($200 million of senior secured debentures).
DBRS Morningstar believes that continued market share gains and pricing power in ABB and modest EBITDA growth in Cogeco Connexion, despite the expectation of net subscriber losses, should continue to drive an increase in Cogeco’s earnings in the low- to mid-single-digit range. DBRS Morningstar expects F2021 revenue to increase in the low- to mid-single-digit range, reflecting acquisition activity in the U.S. and Canada (including DERYTelecom, which closed on December 14, 2020); the rollout of Internet Protocol TV in the Canadian footprint; execution on high-growth opportunities in Florida; and the expansion of 1Gig service across the Company’s entire footprint. DBRS Morningstar expects the F2021 EBITDA margin to compress modestly YOY, primarily because of an increase in advertising and marketing activities and on-premise activities. As a result, DBRS Morningstar expects F2021 EBITDA to increase in the low-single-digit range YOY.
DBRS Morningstar expects Cogeco’s financial profile to remain supportive of the current ratings as the Company has successfully deleveraged following the MetroCast acquisition through a combination of operating performance and the allocation of divestiture proceeds from Cogeco Peer 1 toward debt reduction. With gross leverage expected to move toward 3.0x over the near to medium term (including the DERYtelecom acquisition), DBRS Morningstar expects Cogeco to balance its capital allocation toward dividends, share repurchases, and future acquisition activity and/or investments that should position the Company to deliver long-term earnings growth.
Looking ahead, if operating metrics deteriorate materially and/or leverage moves structurally higher toward 3.5x to 4.0x, DBRS Morningstar may take a negative rating action on Cogeco’s Issuer Rating. Conversely, if operating performance consistently outpaces expectations with a material expansion of the Company’s service offering while maintaining its current leverage, DBRS Morningstar may take a positive rating action on Cogeco’s Issuer Rating.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Communications Industry (July 30, 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 24, 2020), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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